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<SEC-DOCUMENT>0000796534-02-000003.txt : 20020415
<SEC-HEADER>0000796534-02-000003.hdr.sgml : 20020415
ACCESSION NUMBER:		0000796534-02-000003
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		5
CONFORMED PERIOD OF REPORT:	20011231
FILED AS OF DATE:		20020329

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			NATIONAL BANKSHARES INC
		CENTRAL INDEX KEY:			0000796534
		STANDARD INDUSTRIAL CLASSIFICATION:	NATIONAL COMMERCIAL BANKS [6021]
		IRS NUMBER:				541375874
		STATE OF INCORPORATION:			VA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-15204
		FILM NUMBER:		02593384

	BUSINESS ADDRESS:	
		STREET 1:		PO BOX 90002
		CITY:			BLACKSBURG
		STATE:			VA
		ZIP:			24062-9002
		BUSINESS PHONE:		5405522011

	MAIL ADDRESS:	
		STREET 1:		100 SOUTH MAIN STREET
		STREET 2:		PO BOX 90002
		CITY:			BLACKSBURG
		STATE:			VA
		ZIP:			24062-9002
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

              Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

For the fiscal year ended                       Commission file number
   December 31, 2001                                   O-15204

                            National Bankshares, Inc.
- --------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

           Virginia                                   54-1375874
- -------------------------------          ---------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

      101 Hubbard Street
      Blacksburg, Virginia                                  24060
- ----------------------------------------             --------------------
(Address of principal executive offices)                  Zip Code

Registrant's telephone number, including area code      (540) 951-6300
                                                     --------------------

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $2.50 per Share
- --------------------------------------------------------------------------------
                                (Title of Class)

Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
    Yes   X        No
        -----        -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
          ---

The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 5, 2002 was $74,094,317. (In determining this amount, the
registrant assumes that all of its Directors and principal Officers are
affiliates. Such assumption shall not be deemed conclusive for any other
purposes.)

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.

           Class                                  Outstanding at March 5, 2002
- ------------------------------                   ------------------------------
Common Stock, $2.50 Par Value                              3,511,377


                       DOCUMENTS INCORPORATED BY REFERENCE

Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 2001, is incorporated by reference into Parts I and II
of this report.

Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held April 9, 2002 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.


                                      (This report contains 43 pages.)
                                (The Index of Exhibits are on pages 42 & 43.)



                                       1
<PAGE>



                                Table of Contents


                                                                            Page
Part I                                                                      ----

Item 1.      Business                                                        3
Item 2.      Properties                                                      31
Item 3.      Legal Proceedings                                               31
Item 4.      Submission of Matters to a Vote of
              Security Holders                                               31
             Executive Officers of the Registrant                            32
Part II

Item 5.      Market for Registrant's Common
              Equity and Related Stockholder
              Matters                                                        34
Item 6.      Selected Financial Data                                         34
Item 7.      Management's Discussion and Analysis
              of Financial Condition and Results
              of Operations                                                  34
Item 7A.     Quantitative and Qualitative
              Disclosures About Market Risk                                  34
Item 8.      Financial Statements and
              Supplementary Data                                             36
Item 9.      Changes in and Disagreements with
              Accountants on Accounting and
              Financial Disclosure                                           37
Part III

Item 10.     Directors and Executive Officers of
               the Registrant                                                37
Item 11.     Executive Compensation                                          37
Item 12.     Security Ownership of Certain
               Beneficial Owners and Management                              37
Item 13.     Certain Relationships and Related
               Transactions                                                  37
Part IV

Item 14.     Exhibits, Financial Statement
               Schedules, and Reports on Form 8-K                            38

Signatures                                                                   41

Index to Exhibits                                                          42-43

                                       2
<PAGE>


                                     Part I


($ In Thousands Except Per Share Data)


Item 1.  Business.
- -----------------

History and Business

  National Bankshares, Inc. (Bankshares) is a bank holding company organized
under the laws of Virginia in 1986 and registered under the Bank Holding Company
Act (BHCA). Bankshares conducts a good deal of its business operations through
its wholly-owned bank subsidiaries, The National Bank of Blacksburg (NBB), Bank
of Tazewell County (BTC) and through National Bankshares Financial Services,
Inc. (NBFS) doing business as National Bankshares Investment Services and
National Bankshares Financial Services, collectively referred to as "The
Company".

The National Bank of Blacksburg

  The National Bank of Blacksburg was originally chartered as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its thirteen
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous services
normally offered by commercial banks. NBB also conducts a general trust
business. Through its trust operation, NBB offers a variety of personal and
corporate trust services.

  NBB makes loans in all major loan categories, including commercial, commercial
and residential real estate, construction and consumer loans.

  At December 31, 2001, NBB had total assets of $358,009. Total deposits at this
date were $322,711. NBB's net income for 2001 was $4,765 which produced a return
on average assets of 1.36% and a return on average stockholders' equity of
14.62%. Refer to footnote 11 of the Company's 2001 Annual Report to Stockholders
for NBB's risk-based capital ratios.

Bank of Tazewell County

  The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the new institution became Farmers Bank of Clinch Valley. Bank of Tazewell
County resulted from the 1964 merger of Bank of Graham, Bluefield, Virginia with


                                       3
<PAGE>


Farmers Bank of Clinch Valley. BTC provides general retail and commercial
banking services to individuals, businesses and local government units. These
services include commercial, real estate and consumer loans. Deposit accounts
offered include demand deposit accounts, interest-bearing demand deposit
accounts, money market deposit accounts, savings accounts and certificates of
deposit. Other services include automatic funds transfer, collections, night
depository, safe deposit, travelers checks, savings bond sales and utility
payment services; and providing other miscellaneous services normally offered by
commercial banks. BTC also conducts a general trust business.

  At December 31, 2001 BTC had total assets of $283,425. Total deposits at this
same date were $254,060. BTC's net income for 2001 was $2,550 which produced a
return on average assets of 0.90% and a return on average stockholders' equity
of 9.21%. Refer to footnote 11 of the Company's 2001 Annual Report to
Stockholders for BTC's risk-based capital ratios.

National Bankshares Financial Services

  On April 9, 2001 National Bankshares Financial Services Inc., a wholly-owned
subsidiary began offering non-deposit investment products and insurance products
for sale to the public. NBFS is working with Bankers Insurance, LLC, a joint
effort of Virginia banks originally sponsored by the Virginia Bankers
Association. In another cooperative effort, NBFS is working with UVEST Financial
Services Group, Inc. to offer investment services.

Commercial Loans

  NBB and BTC make both secured and unsecured loans to businesses and to
individuals for business purposes. Loan requests are granted based upon several
factors including credit history, past and present relationships with the bank
and marketability of collateral. Unsecured commercial loans must be supported by
a satisfactory balance sheet and income statement. Collateralized business loans
may be secured by a security interest in marketable equipment, accounts
receivable, business equipment and/or general intangibles of the business. In
addition, or as an alternative, the loan may be secured by a deed of trust lien
on business real estate.

  The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.

Residential Real Estate Loans

  Loans secured by residential real estate are originated by both bank
subsidiaries. NBB sells a substantial percentage of the residential real estate
loans it originates in the secondary market on a servicing released basis. There
are occasions when a borrower or the real estate do not qualify under secondary
market criteria, but the loan request represents a reasonable credit risk. Also,
an otherwise qualified borrower may choose not to have their mortgage loan sold.
On these occasions, if the loan meets NBB's internal underwriting criteria, the
loan will be closed and placed in NBB's portfolio. Some residential loans
originated by BTC are held in the bank's loan portfolio and others are sold in
the secondary market. In their secondary market operations, NBB and BTC
participate in insured loan programs sponsored by the Department of Housing and

                                       4
<PAGE>


Urban Development, the Veterans Administration and the Virginia Housing
Development Authority.

  Residential real estate loans carry risk associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.

Construction Loans

  NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsibly business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is more limited than NBB's due to the nature
of its market area.

  In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral may at any point in time be less than the principal amount of the
loan. Construction loans also bear the risk that the general contractor, who may
or may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are made as permanent financing of construction loans
may likewise under certain circumstances be affected by external financial
pressures.

Consumer Loans

  NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. Loans used to purchase vehicles or other specific personal
property and loans associated with real estate are usually secured with a lien
on the subject vehicle or property.

  Negative changes in a customer's financial circumstances due to a large number
of factors, such as illness or loss of employment, can place the repayment of a
consumer loan at risk. In addition, deterioration in collateral value can add
risk to consumer loans.

Sales and Purchases of Loans

  NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market residential mortgage
loans regularly sold by NBB.

  Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.


                                       5
<PAGE>


  The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.

  The following table sets forth, for the three fiscal years ended December 31,
2001, 2000 and 1999 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.

                                                             Percentage of
Period                  Class of Service                     Total Revenues
- ------                  ----------------                     --------------
December 31, 2001       Interest and Fees on Loans               55.84%
                        Interest on Investments                  21.37%
December 31, 2000       Interest and Fees on Loans               66.74%
                        Interest on Investments                  21.22%
December 31, 1999       Interest and Fees on Loans               64.95%
                        Interest on Investments                  24.41%

Market Area

The National Bank of Blacksburg Market Area

  NBB's primary market area consists of the northern portion of Montgomery
County, all of Giles County, all of Pulaski County, the City of Radford, the
City of Galax and adjacent portions of Carroll and Grayson Counties, Virginia.
This area includes the towns of Blacksburg and Christiansburg in Montgomery
County, the towns of Pearisburg, Pembroke and Rich Creek, in Giles County, and
the towns of Dublin and Pulaski in Pulaski County. The local economy is diverse
and is oriented toward higher education, retail and service, light manufacturing
and agriculture.

  Montgomery County's largest employer is Virginia Polytechnic Institute and
State University (VPI & SU) located in Blacksburg. VPI & SU is the
Commonwealth's land grant college and also its largest university. Employment at
VPI & SU has remained stable over the past three years, and it is not expected
to change materially in the next few years. A second state supported university,
Radford University, is located in NBB's service area. It too has provided stable
employment opportunities in the region.

  Giles County's primary employer is the Celanese Corp. plant, a manufacturer of
the material from which cigarette filters are made. Employment at this plant has
remained relatively stable over the past several years.

  Pulaski County's major employer is the Volvo Heavy Trucks production facility.
During 2000, the Volvo company laid off a significant number of workers, and the
trend is likely to continue in the near term as the demand for heavy trucks
nationwide is very low. The county also has several large furniture plants, most
notably Pulaski Furniture and Ethan Allen. Pulaski Furniture recently announced
a small work force reduction.


                                       6
<PAGE>


  The City of Galax is located in the Virginia-North Carolina
furniture-manufacturing region. Three furniture companies, Vaughan Bassett
Furniture Company, Vaughan Furniture Company, Inc. and Webb Furniture Company
together employ the largest percentage of the area's work force. The Galax
economy is stable, but furniture manufacturing has been negatively affected in
the recent economic downturn.

  Several other small manufacturing concerns are located in Montgomery, Giles
and Pulaski Counties and in the City of Galax. These concerns manufacture
diverse products and are not dependent on one sector of the economy. Agriculture
and tourism are also important to the region, especially in Giles County and in
the area near Galax.

  Since 1988, Montgomery County has developed into a regional retail center,
with the construction of several large shopping areas. Two area hospitals, each
of which are affiliated with different large health care systems, have
constructed additional facilities attracting health care providers to Montgomery
County, making it a center for basic health care services. VPI & SU's Corporate
Research Center has brought small high tech companies to Blacksburg, and further
expansion is planned.

  NBB's primary market area offers the advantages of a good quality of life,
scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and it
has had some recent success attracting retirees, particularly from the Northeast
and urban Northern Virginia. These marketing efforts are expected to continue.

Bank of Tazewell County Market Area

  Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, West Virginia. This includes the towns of Tazewell, Richlands and
Bluefield, Virginia and Bluefield, West Virginia. BTC has also recently added
offices located in the Towns of Wytheville, Marion and Abingdon located in
Wythe, Smyth and Washington Counties, Virginia, respectively. BTC's primary
market area has largely depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have mechanized reducing the
number of individuals required for the production of coal. However, there are
still a number of support industries for the coal mining business that continue
to provide employment in the area. Additionally, several new businesses have
been established in the area, and Bluefield, West Virginia has emerged as a
regional medical center. Real estate values remain stable and comparable to
other areas in southwest Virginia. BTC's expanded market areas in Wythe, Smyth
and Washington Counties have a diverse economic base, with manufacturing,
agriculture, education and service industries all represented.


                                       7
<PAGE>


Competition

  The banking and financial service business in Virginia, generally, and in
NBB's and BTC's market areas specifically, is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems and new competition from
non-traditional financial services. The Company's bank subsidiaries compete for
loans and deposits with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, money market funds,
credit unions and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
NBB and BTC. In order to compete, NBB and BTC rely upon service-based business
philosophies, personal relationships with customers, specialized services
tailored to meet customers' needs and the convenience of office locations. In
addition, the banks are generally competitive with other financial institutions
in their market areas with respect to interest rates paid on deposit accounts,
interest rates charged on loans and other service charges on loans and deposit
accounts.

Registrant's Organization and Employment

  Bankshares, NBB, BTC and NBFS are organized in a holding company/subsidiary
structure. Until January 1, 2002, Bankshares had no employees, except for
officers, and it conducted substantially all of its operations through its
subsidiaries. Until January 1, 2002, all compensation paid to Bankshares
officers was paid by the subsidiary banks, except for fees paid to Chairman,
President and Chief Executive Officer James G. Rakes and to Corporate Officer
Cameron L. Forrester for their service as directors of the Company. On January
1, 2002, several administrative functions that serve multiple subsidiaries were
moved to the holding company level. These functions include audit, compliance,
loan review and human resources. Employees performing these functions who were
formerly employed at the bank level will now be employed at the holding company
level.

  At December 31, 2001, NBB employed 140 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 2001
employed 102 full time equivalent employees in its various offices and
operational areas.

Certain Regulatory Considerations

  Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or
BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.


                                       8
<PAGE>


National Bankshares, Inc.

  Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Gramm-Leach-Bliley Act of
1999.

  The Bank Holding Company Act. The BHCA is administered by the Federal Reserve
Board, and Bankshares is required to file with the Federal Reserve Board an
annual report and any additional information the Federal Reserve Board may
require under the BHCA. The Federal Reserve Board also is authorized to examine
Bankshares and its subsidiaries. The BHCA requires every bank holding company to
obtain the approval of the Federal Reserve Board before (i) it or any of its
subsidiaries (other than a bank) acquires substantially all the assets of any
bank; (ii) it acquires ownership or control of any voting shares of any bank if
after the acquisition it would own or control, directly or indirectly, more than
5% of the voting shares of the bank; or (iii) it merges or consolidates with any
other bank holding company.

  The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as Bankshares, subject to certain exemptions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of Bankshares. Control is rebuttably presumed to exist if a
person acquires 10% or more, but less than 25%, of any class of voting
securities of Bankshares. The regulations provide a procedure for challenging
the rebuttable control presumption.

  Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be incident to
banking. Under recent amendments to the BHCA, included in the Gramm-Leach-Bliley
Act of 1999 (see below), any bank holding company, all the depository
institution subsidiaries of which are well-capitalized, well managed (as those
terms are defined in the BHCA) and have a satisfactory or better rating under
the Community Reinvestment Act as of their last examination, may file an
election with the Federal Reserve Board to become a Financial Holding Company. A
Financial Holding Company may engage in any activity that is (i) financial in
nature (ii) incidental to a financial activity or (iii) complementary to a
financial activity. The BHCA provides a long list of "financial activities",
including: insurance underwriting; securities dealing and underwriting;
providing financial, investment or economic arising services; and merchant
banking activities. Financial Holding Companies may also engage in other
activities that the Federal Reserve Board has determined are permissible under
the BHCA, by regulation or order.


                                       9
<PAGE>


  The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and these loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.

  The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the GLBA), enacted on
November 12, 1999, broadly rewrote financial services legislation. The GLBA
permits significant combinations among different sectors of the financial
services industry; allows for significant expansion of financial service
activities by Bank holding companies and provides for a regulatory framework by
various governmental authorities responsible for different financial activities;
and offers certain financial privacy protections to consumers. The GLBA repealed
affiliation and management interlock prohibitions of the Depression-era
Glass-Steagall Act and, by amending the Bank Holding Companies, the GLBA added
new substantive provisions to the non-banking activities permitted under the
BHCA with the creation of the financial holding company. The GLBA preempts most
state laws that prohibit financial holding companies from engaging in insurance
activities. The GLBA permits affiliations between banks and securities firms
within the same holding company structure, and the Act permits financial holding
companies to directly engage in a broad range of securities and merchant banking
activities.

  The Gramm-Leach-Bliley Act has and will lead to important changes in the
manner in which financial services are delivered in the United States. Bank
holding companies and their subsidiary banks are able to offer a much broader
array of financial services; however, there is greater competition in all
sectors of the financial services market.

  The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued under Virginia law by the Commission have
been complied with, and may make examinations of any bank holding company and
its subsidiaries. The Virginia Banking Act allows bank holding companies located
in any state to acquire a Virginia bank or bank holding company if the Virginia
bank or bank holding company could acquire a bank holding company in their state
and the Virginia bank or bank holding company to be acquired has been in
existence and continuously operated for more than two years. The Virginia
Banking Act permits bank holding companies from throughout the United States to
enter the Virginia market, subject to federal and state approval.


                                       10
<PAGE>


NBB and BTC

  General. NBB is a national banking association incorporated under the laws of
the United States and is subject to examination by the Office of the Comptroller
of the Currency (the OCC). Deposits in NBB are insured by the FDIC up to a
maximum amount (generally $100,000 per depositor, subject to aggregation rules).
The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare quarterly
reports on NBB's financial condition and to conduct an annual audit of its
financial affairs in compliance with minimum standards and procedures prescribed
by the OCC. NBB also is required by the OCC to adopt internal control structures
and procedures in order to safeguard assets and monitor and reduce risk
exposure. While appropriate for safety and soundness of banks, these
requirements impact banking overhead costs.

  BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, these banks are prohibited from engaging in certain
tie-in-arrangements in connection with any extension of credit or the providing
of any property of service.

  The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.

  Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. Under the
implementing CRA regulations, banks have the option of being assessed for CRA
compliance under one of several methods. Small banks are evaluated differently
than larger banks and technically are not subject to some data collection
requirements. The focus of the regulations is on the volume and distribution of
a bank's loans, with particular emphasis on lending activity in low and
moderate-income areas and to low and moderate-income persons. The regulations
place substantial importance on a bank's product delivery system, particularly
branch locations. The regulations require banks, other than small banks, to


                                       11
<PAGE>


comply with significant data collection requirements. The regulatory agency's
assessment of the bank's record is made available to the public. Further, this
assessment is required for any bank which has applied to, among other things,
establish a new branch office that will accept deposits, relocate an existing
office, or merge, consolidate with or acquire the assets or assume the
liabilities of a federally regulated financial institution. It is likely that
banks' compliance with the CRA, as well as other fair lending laws, will face
ongoing government scrutiny and that costs associated with compliance will
continue to increase.

  NBB has received a CRA rating of "Outstanding" in its last examination by
federal bank regulators. BTC was rated as "Satisfactory".

  Federal Deposit Insurance Corporation Improvement Act of 1991. The
difficulties encountered nationwide by financial institutions during 1990 and
1991 prompted federal legislation designed to reform the banking industry and to
promote the viability of the industry and of the deposit insurance system.
FDICIA, which became effective on December 19, 1991, bolsters the deposit
insurance fund, tightens bank regulation and trims the scope of federal deposit
insurance.

  The legislation bolsters the bank deposit insurance fund with $70 billion in
borrowing authority and increases to $30 billion from $5 billion the amount the
FDIC can borrow from the U.S. Treasury to cover the cost of bank failures. The
loans, plus interest, would be repaid by premiums that banks pay on domestic
deposits over the next fifteen years.

  Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect to banks that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized."

  If a depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An institution's
principal federal regulator may deem the institution to be engaging in an unsafe
or unsound practice if it receives a less than satisfactory rating for asset
quality, management, earnings or liquidity in its most recent examination.

  Among other possible sanctions, an undercapitalized depository institution may
not pay dividends and is required to submit a capital restoration plan to its
principal federal regulator. In addition, its holding company may be required to
guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.


                                       12
<PAGE>


  In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual
on-site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety and
soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.

  FDICIA reduces the scope of federal deposit insurance. The most significant
change ended the "too big to fail" doctrine, under which the government protects
all deposits in most banks, including those exceeding the $100,000 insurance
limit. The FDIC's ability to reimburse uninsured deposits--those over $100,000
and foreign deposits--has been sharply limited. Since December 1993, the Federal
Reserve Board's ability to finance undercapitalized banks with extended loans
from its discount window has been restricted. In addition, only the best
capitalized banks will be able to offer insured brokered deposits without FDIC
permission or to insure accounts established under employee pension plans.

  Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.

  National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval of
the OCC, NBB can acquire existing banking operations in Virginia. As a state
bank, BTC is subject to Virginia state branching laws. With BFI and Federal
Reserve Bank approval, BTC is able to acquire existing banking operations in the
state.

  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Interstate Act) allows bank holding companies to acquire banks in any state,
without regard to state law, except that if the state has a minimum requirement
for the amount of time a bank must be in existence, that law must be preserved.
Under the Virginia Banking Act, a Virginia bank or all of the subsidiaries of
Virginia holding companies sought to be acquired must have been in continuous
operation for more than two years before the date of such proposed acquisition.
The Interstate Act also permits banks to acquire out-of-state branches through
interstate mergers, if the state has not opted out of interstate branching. De
novo branching, where an out-of-state bank holding company sets up a new branch
in another state, requires a state's specific approval. An acquisition or merger
is not permitted under the Interstate Act if the bank, including its insured
depository affiliates, will control more than 10% of the total amount of
deposits of insured depository institutions in the United States, or will
control 30% or more of the total amount of deposits of insured depository
institutions in any state.


                                       13
<PAGE>


  Virginia has, by statute, elected to opt-in fully to interstate branching
under the Interstate Act. Under the Virginia statute, Virginia state banks may,
with the approval of the Virginia State Corporation Commission, establish and
maintain a de novo branch or acquire one or more branches in a state other than
Virginia, either separately or as part of a merger. Procedures also are
established to allow out-of-state domiciled banks to establish or acquire
branches in Virginia, provided the "home" state of the bank permits Virginia
banks to establish or acquire branches within its borders. The activities of
these branches are subject to the same laws as Virginia domiciled banks, unless
such activities are prohibited by the law of the state where the bank is
organized. The Virginia State Corporation Commission has the authority to
examine and supervise out-of-state state banks to ensure that the branch is
operating in a safe and sound manner and in compliance with the laws of
Virginia. The Virginia statute authorizes the Bureau of Financial Institutions
to enter into cooperative agreements with other state and federal regulators for
the examination and supervision of out-of-state banks with Virginia operations,
or Virginia domiciled banks with operations in other states. Likewise, national
banks, with the approval of the OCC, may branch into and out of the state of
Virginia. Any Virginia branch of an out-of-state national bank is subject to
Virginia law (enforced by the OCC) with respect to intrastate branching,
consumer protection, fair lending and community reinvestment as if it were a
branch of a Virginia bank, unless preempted by federal law.

  The Interstate Act permits banks and bank holding companies from throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and makes it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by the Company has
increased as a result of the Interstate Act and the Virginia interstate banking
statutes.

  Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Beginning in 1997, all banks, including NBB
and BTC, were subject to an additional FDIC assessment which funds interest
payments for bank issues to resolve problems associated with the savings and
loan industry. This assessment will continue until 2018-2019. The assessment
will vary over the period from 1.29 cents to 2.43 cents per $100 of deposits.

  Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (the GLBA) allows
national banks, with OCC approval, to acquire financial subsidiaries to engage
in any activity that is financial in nature or incidental to a financial
activity, as defined in the Bank Holding Act, except (i) insurance underwriting,
(ii) merchant or insurance portfolio investments, and (iii) real estate
development or investment. Well-capitalized national banks are also given the
authority to engage in municipal bond underwriting.


                                       14
<PAGE>


  To establish or acquire a financial subsidiary, a national bank must be
well-managed, and the consolidated assets of its financial subsidiary must not
exceed the lesser of 45% of the consolidated total assets of the bank or $50
billion. The relationship between a national bank and a financial subsidiary are
subject to a variety of supervisory enhancements from regulators. The GLBA also
provides that state banks that establish or acquire financial subsidiaries are
required to comply with the same safeguards imposed on the financial
subsidiaries of national banks.

  Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and credit
and interest rates in order to influence general economic conditions. These
policies have a significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.

  Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive
half-year periods (in the case of an annual dividend) or (ii) the preceding
half-year period (in the case of a quarterly or semi-annual dividend). The
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus or to fund the retirement of preferred stock.

  The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan and lease losses will not be considered an
element of "undivided profits then on hand" and provisions to the allowance are
treated as expenses and therefore not part of "net profits." Accordingly, a
national bank with an allowance greater than its statutory bad debts may not
include the excess in calculating undivided profits for dividend purposes.
Further, a national bank may be able to use a portion of its earned capital
surplus account as "undivided profits then on hand," depending on the
composition of that account.

  As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount


                                       15
<PAGE>


greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.

  In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.

  Virginia law also imposes restrictions on the ability of BTC to pay dividends.
A Virginia state bank is permitted to declare a dividend out of its "net
undivided profits", after providing for all expenses, losses, interest and taxes
accrued or due by the bank. In addition, a deficit in capital originally paid in
must be restored to its initial level, and no dividend can be paid which could
impair the bank's paid in capital. The Bureau of Financial Institutions further
has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.

  The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.

  Capital Requirements. The Federal Reserve Board has adopted risk-based capital
guidelines which are applicable to Bankshares and BTC. The Federal Reserve Board
guidelines redefine the components of capital, categorize assets into different
risk classes and include certain off-balance sheet items in the calculation of
risk-weighted assets. The minimum ratio of qualified total capital to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8.0%. At least half of the total capital must be comprised
of Tier 1 capital for a minimum ratio of Tier 1 Capital to risk-weighted assets
of 4.0%. The remainder may consist of a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of loan
and lease loss reserves. The OCC has adopted similar regulations applicable to
NBB.

  In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total average assets less intangibles) guidelines that are
applicable to Bankshares and BTC. The OCC has adopted similar regulations
applicable to NBB. These guidelines provide for a minimum ratio of 4.0% for
banks that meet certain specified criteria, including that they have the highest
regulatory CAMELS rating and are not anticipating or experiencing significant
growth and have well-diversified risk. All other banks will be required to
maintain an additional cushion of at least 100 to 200 basis points, based upon


                                       16
<PAGE>


their particular circumstances and risk profiles. The guidelines also provide
that banks experiencing internal growth or making acquisitions will be expected
to maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.

  Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.

Other Legislative and Regulatory Concerns

  Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted or how these
proposals would affect the Company.

Other Business Concerns

  The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates which must be paid on deposits and those which
may be charged on loans is an important component of profit. In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits. Rising interest rates typically reduce the demand for new loans,
particularly the real estate loans which represent a significant portion of
NBB's and BTC's loan demand, as well as certain NBB loans in which BTC
participates.


                                       17
<PAGE>


               Statistical Disclosure by National Bankshares, Inc.
                         and Subsidiaries (The Company)

I.  Distribution of Assets, Liabilities and Stockholders' Equity;
    Interest Rates and Interest Differential

    A.     Average Balance Sheets

    The following table presents, for the years indicated, condensed daily
    average balance sheet information.

<TABLE>
<CAPTION>

($ in thousands)
                                                                  December 31,
                                                   --------------------------------------------
Assets                                                     2001          2000           1999
===============================================================================================
<S>                                                       <C>           <C>            <C>
Cash and due from banks                                   $10,221       $11,355        $12,820
Interest - bearing deposits                                10,986        10,683          5,263
Federal funds sold                                         18,419         6,149          2,926
Securities available for sale:
   Taxable                                                 69,486        87,813         95,979
   Nontaxable                                              40,196        31,302         29,286
Securities held to maturity:
   Taxable                                                 46,043         9,029          8,940
   Nontaxable                                              33,084        14,542         17,219
Mortgage loans held for sale                                  808           519            709
Loans, net                                                376,958       310,624        266,431
Other assets                                               29,491        18,365         14,616
                                                   --------------------------------------------
     Total assets                                        $635,692      $500,381       $454,189
===============================================================================================


Liabilities and Stockholders' Equity
===============================================================================================
Noninterest-bearing demand
 Deposits                                                 $66,793       $56,709        $55,700
Interest-bearing demand deposits                          116,529        85,713         85,284
Savings deposits                                           47,175        43,138         46,792
Time deposits                                             338,642       248,113        203,807
                                                   --------------------------------------------
     Total deposits                                      $569,139      $433,673       $391,583
Short-term borrowings                                         295         9,011          4,228
Other liabilities                                           2,798         2,015          2,182
                                                   --------------------------------------------
   Total liabilities                                     $572,232      $444,699       $397,993
Stockholders' equity                                       63,460        55,682         56,196
                                                   --------------------------------------------
   Total liabilities and
    Stockholders' equity                                 $635,692      $500,381       $454,189
===============================================================================================
</TABLE>


                                       18
<PAGE>



B.       Analysis of Net Interest Earnings
         The following table shows the major categories of interest-earning
         assets and interest-bearing liabilities, the interest earned or paid,
         the average yield or rate on the daily average balance outstanding, net
         interest income and net yield on average interest-earning assets for
         the years indicated.

<TABLE>
<CAPTION>

                         -------------------------------   -----------------------------    -------------------------------
                               December 31, 2001                  December 31, 2000                 December 31, 1999
                         -------------------------------   -----------------------------    -------------------------------
                                                Average                          Average                           Average
                          Average                Yield/     Average               Yield/     Average                Yield/
($ in thousands)          Balance    Interest     Rate      Balance    Interest    Rate      Balance    Interest     Rate
                         -------------------------------   ------------------------------   -------------------------------
<S>                      <C>         <C>       <C>         <C>         <C>      <C>         <C>        <C>         <C>

Interest-earning
 Assets:
Loans, net (1)(2)(3)     $381,778    $33,584      8.80%     $314,685   $28,454     9.04%     $267,140    $24,244     9.08%
Taxable securities        115,529      7,501      6.56%       96,842     6,760     6.98%      104,919      6,820     6.50%
Nontaxable
 Securities (1)            73,280      5,091      6.49%       45,844     3,420     7.46%       46,505      3,414     7.34%
Federal funds sold         18,419        652      3.54%        6,149       338     5.50%        2,926        170     5.81%
Interest bearing
 Deposits                  10,986        577      5.25%       10,683       689     6.45%        5,263        269     5.11%
                         -------------------------------   ------------------------------   -------------------------------
Total interest-
 Earning assets          $599,992    $47,405      7.90%     $474,203   $39,661     8.36%     $426,753    $34,917     8.18%
                         ===============================   ==============================   ===============================
Interest-bearing
 Liabilities:
Interest-bearing
 Demand deposits         $116,529     $2,518      2.16%      $85,713    $2,243     2.62%      $85,284     $2,129     2.50%
Savings deposits           47,175        919      1.95%       43,138     1,135     2.63%       46,792      1,212     2.59%
Time deposits             338,642     19,326      5.71%      248,113    14,157     5.71%      203,807     10,630     5.22%
Short-term
 Borrowings                   295          8      2.71%        1,727       118     6.83%        4,228        232     5.49%
Long-term debt                ---        ---        ---        7,284       510     7.00%          ---        ---       ---
                         -------------------------------   ------------------------------   -------------------------------
Total interest-
 Bearing liabilities     $502,641    $22,771      4.53%     $385,975   $18,163     4.71%     $340,111    $14,203     4.18%
                         ===============================   ==============================   ===============================
Net interest income
 and interest rate
 spread                              $24,634      3.37%                $21,498     3.66%                 $20,714     4.00%
                         ================================================================   ===============================
Net yield on average
 Interest-earning
 Assets                                           4.11%                            4.53%                             4.85%
                         ==================================================================================================
</TABLE>

(1)      Interest on nontaxable loans and securities is computed on a fully
         taxable equivalent basis using a Federal income tax rate of 34%.
(2)      Loan fees of $608 in 2001, $381 in 2000 and $680 in 1999 are included
         in total interest income.
(3)      Nonaccrual loans are included in average balances for yield
         computations.


                                       19
<PAGE>



C.       Analysis of Changes in Interest Income and Interest Expense

         The Company's primary source of revenue is net interest income, which
         is the difference between the interest and fees earned on loans and
         investments and the interest paid on deposits and other funds. The
         Company's net interest income is affected by changes in the amount and
         mix of interest-earning assets and interest-bearing liabilities and by
         changes in yields earned on interest-earning assets and rates paid on
         interest-bearing liabilities. The following table sets forth, for the
         years indicated, a summary of the changes in interest income and
         interest expense resulting from changes in average asset and liability
         balances (volume) and changes in average interest rates (rate).
<TABLE>
<CAPTION>


                                    ==============================================================================================
                                                    2001 Over 2000                                 2000 Over 1999
                                    ----------------------------------------------------------------------------------------------
                                            Changes Due To                                 Changes Due To
                                    -----------------------------                  -----------------------------
                                                                     Net Dollar                                     Net Dollar
($ in thousands)                       Rates(2)       Volume(2)        Change         Rates(2)       Volume(2)        Change
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>             <C>              <C>           <C>             <C>

Interest income:(1)
  Loans                                 $(791)         $5,921          $5,130           $(89)         $4,299          $4,210
  Taxable securities                     (430)          1,171             741            485            (545)            (60)
  Nontaxable securities                  (249)          1,920           1,671             55             (49)              6
  Federal funds sold                     (157)            471             314            (10)            178             168
  Interest bearing deposits              (131)             19            (112)            85             335             420

- -----------------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in
 income on interest-
 earning assets                       $(1,758)         $9,502          $7,744           $526          $4,218          $4,744
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
  Interest-bearing demand
   deposits                             $(437)           $712            $275           $103             $11            $114
  Savings deposits                       (315)             99            (216)            19             (96)            (77)
  Time deposits                             3           5,166           5,169          1,065           2,462           3,527
  Short-term borrowings                   (46)            (64)           (110)            47            (161)           (114)
  Long-Term Borrowings                    ---            (510)           (510)           ---             510             510

- -----------------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in
 expense of interest-
 bearing liabilities                    $(795)         $5,403          $4,608         $1,234          $2,726          $3,960
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
 interest income                        $(963)         $4,099          $3,136          $(708)         $1,492            $784
===================================================================================================================================

</TABLE>


(1)      Taxable equivalent basis using a Federal income tax rate of 34%.
(2)      Variances caused by the change in rate times the change in volume have
         been allocated to rate and volume changes proportional to the
         relationship of the absolute dollar amounts of the change in each.


                                       20
<PAGE>


 II.     Investment Portfolio

         A.     Book Value of Investments
                The amortized costs and fair values of securities available for
                sale as of December 31, 2001, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>

                                                  =============================================================
                                                                              December 31,
                                                  --------------------------------------------------------------------------------
                                                  --------------------------------------------------------------------------------
                                                              2001                      2000                       1999
                                                  --------------------------------------------------------------------------------
                                                     Amortized       Fair      Amortized      Fair      Amortized       Fair
($ in thousands)                                       Costs        Values       Costs       Values       Costs        Values
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>           <C>         <C>         <C>           <C>
Available for sale:
 U.S. Treasury                                         $6,248     $ 6,490        $6,246     $ 6,331      $ 6,244       $ 6,164
 U.S. Government agencies and
  corporations                                          5,340       5,375        54,815      54,034       50,373        47,498
 States and political subdivisions                     51,030      51,189        35,456      35,606       32,903        31,617
 Mortgage-backed securities (1)                        13,178      13,415        11,818      11,776       13,464        13,176
 Corporate debt securities                              9,066       9,093        14,341      14,058       14,349        13,646
 Federal Home Loan Bank stock                           1,411       1,411         1,329       1,329        1,329         1,329
 Federal Reserve Bank stock                               209         209           209         209          247           247
 Other securities                                       1,328       1,485           442         442          168           168
                                                     -----------------------------------------------------------------------------
    Total securities available for sale               $87,810     $88,667      $124,656    $123,785     $119,077      $113,845
==================================================================================================================================
</TABLE>

                The amortized costs of securities held to maturity as of
                December 31, 2001, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>

                                                     ================================================
                                                                         December 31,
                                                     ------------------------------------------------
                                                     ------------------------------------------------
($ in thousands)                                         2001               2000            1999
=====================================================================================================
- -----------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>              <C>
Held to maturity:
 U.S. Treasury                                           $ ---              $ ---           $ 500
 U.S. Government agencies and corporations              17,025              8,500           5,500
 States and political subdivisions                      49,230             17,288          17,283
 Mortgage-backed securities (1)                         13,723                288             364
 Corporate                                              22,831              6,483             ---
                                                     ------------------------------------------------
    Total securities held to maturity                $ 102,809           $ 32,559         $ 3,647
=====================================================================================================
</TABLE>

                (1)    The majority of mortgage-backed securities and
                       collateralized mortgage obligations held at December 31,
                       2001 were backed by U.S. agencies. Certain holdings are
                       required to be periodically subjected to the Financial
                       Institution Examination Council's (FFIEC) high risk
                       mortgage security test. These tests address possible
                       fluctuations in the average life and price sensitivity
                       which are the primary risks associated with this type of
                       security. Such tests are usually subject to regulatory
                       review.

                       Except for U.S. Government securities, the Company has no
                securities with any issuer that exceeds 10% of stockholders'
                equity.


                                       21
<PAGE>


B.       Maturities and Associated Yields
         The following table presents the maturities for those securities
         available for sale and held to maturity as of December 31, 2001 and
         weighted average yield for each range of maturities.
<TABLE>
<CAPTION>

                                            ====================================================================================
                                                                            Maturities and Yields
                                                                              December 31, 2001
                                            ------------------------------------------------------------------------------------
($ in thousands except for % data)            < 1 Year      1-5 Years     5-10 Years     > 10 Years      None          Total
================================================================================================================================
<S>                                           <C>          <C>           <C>            <C>            <C>          <C>
Available for Sale
- ------------------
U.S. Treasury                                  $2,553        $3,937           ---            ---          ---         $6,490
                                                 6.23%         5.73%          ---            ---          ---           5.93%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies                          ---         1,534         2,949            892          ---          5,375
                                                  ---          7.43%         7.01%          6.52%         ---           7.05%
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities                        ---           ---         2,133         11,282          ---         13,415
                                                  ---           ---          3.92%          6.68%         ---           6.24%
- --------------------------------------------------------------------------------------------------------------------------------
States and Political                              ---         1,684           ---          1,285          ---          2,969
 Subdivision - taxable                            ---          7.15%          ---           7.77%         ---           7.42%
- --------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivision                  921         8,706        17,981         20,612          ---         48,220
 - nontaxable(1)                                 7.12%         6.82%         6.32%          6.50%         ---           6.50%
- --------------------------------------------------------------------------------------------------------------------------------
Corporate                                         ---         4,168         2,931          1,994          ---          9,093
                                                  ---          6.74%         6.55%          6.59%         ---           6.65%
- --------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock                      ---           ---           ---            ---        1,411          1,411
                                                  ---           ---           ---            ---         5.75%          5.75%
- --------------------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock                        ---           ---           ---            ---          209            209
                                                  ---           ---           ---            ---         6.00%          6.00%
- --------------------------------------------------------------------------------------------------------------------------------
Other securities                                   18           ---           ---            ---        1,467          1,485
                                                 2.03%          ---           ---            ---         6.00%          5.95%
- --------------------------------------------------------------------------------------------------------------------------------
Total                                           3,492        20,029        25,994         36,065        3,087         88,667
                                                 6.44%         6.66%         6.23%          6.61%        3.04%          6.38%
- --------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ----------------
U.S. Treasury                                     ---           ---           ---            ---          ---            ---
                                                  ---           ---           ---            ---          ---            ---
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies                          ---         3,000        10,030          3,995          ---         17,025
                                                  ---          5.84%         5.17%          6.90%         ---           5.69%
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities                          1            28            52         13,642          ---         13,723
                                                 9.00%         7.80%         7.98%          6.00%         ---           6.01%
- --------------------------------------------------------------------------------------------------------------------------------
States and Political                              165         1,057           690            ---          ---          1,912
 Subdivision - taxable                           6.88%         7.05%         5.99%           ---          ---           6.65%
- --------------------------------------------------------------------------------------------------------------------------------
States and Political                            2,426         5,308        18,625         20,959          ---         47,318
 Subdivision - nontaxable                        6.78%         7.08%         6.17%          6.34%         ---           6.38%
- --------------------------------------------------------------------------------------------------------------------------------
Corporate                                         ---        11,488        11,343            ---          ---         22,831
                                                  ---          6.83%         6.80%           ---          ---           6.82%
- --------------------------------------------------------------------------------------------------------------------------------
Other securities                                  ---           ---           ---            ---          ---            ---
                                                  ---           ---           ---            ---          ---            ---
- --------------------------------------------------------------------------------------------------------------------------------
Total                                          $2,592       $20,881       $40,740        $38,596          ---       $102,809
                                                 6.78%         6.77%         6.10%          6.28%         ---           6.32%
================================================================================================================================
</TABLE>

(1)      Rates shown represent weighted average yield on a fully taxable basis.


                                       22
<PAGE>


III.    Loan Portfolio

        The Company concentrates its lending activities in commercial and
        industrial loans, real estate mortgage loans, both residential and
        business, and loans to individuals. The following tables set forth (i) a
        comparison of the Company's loan portfolio by major category of loans as
        of the dates indicated and (ii) the maturities and interest rate
        sensitivity of the loan portfolio at December 31, 2001.

        A.     Types of Loans
<TABLE>
<CAPTION>

                                     ==============================================================
                                                              December 31,
                                     --------------------------------------------------------------
($ in thousands)                         2001        2000        1999        1998        1997
===================================================================================================
<S>                                   <C>        <C>          <C>        <C>           <C>
Commercial and industrial
  loans                                $189,764    $163,929    $149,386    $110,509     $101,379

Real estate mortgage
  loans                                  77,339      71,163      58,829      48,724       42,969

Real estate construction
  loans                                  19,573      16,726      14,669      12,827        8,510

Loans to individuals                    113,413     110,176      73,825      69,493       66,635
                                     --------------------------------------------------------------
 Total loans                           $400,089    $361,994    $296,709    $241,553     $219,493

Less unearned income and
  deferred fees                          (1,775)     (2,313)     (1,916)     (2,296)      (2,503)
                                     --------------------------------------------------------------
 Total loans, net of
  unearned income                      $398,314    $359,681    $294,793    $239,257     $216,990

Less allowance for loans
  losses                                 (4,272)     (3,886)     (3,231)     (2,679)      (2,438)
                                     --------------------------------------------------------------
 Total loans, net                      $394,042    $355,795    $291,562    $236,578     $214,552
===================================================================================================
</TABLE>

        B.     Maturities and Interest Rate Sensitivities
<TABLE>
<CAPTION>

                                        =============================================================
                                                             December 31, 2001
                                        -------------- --------------- -------------- ---------------
                                                                            After
($ in thousands)                            <1 Year       1-5 Years        5 Years         Total
======================================= ============== =============== ============== ===============
<S>                                     <C>             <C>             <C>            <C>
Commercial and
 industrial                                   $50,286         $83,466        $56,012        $189,764
Real estate
 construction                                  19,573             ---            ---          19,573
Less loans with
 predetermined interest                        28,219          39,407         55,544         123,170
 rates
                                        -------------- --------------- -------------- ---------------
Loans with adjustable
 rates                                        $41,640         $44,059           $468         $86,167
======================================= ============== =============== ============== ===============
</TABLE>


                                       23
<PAGE>


        C.     Risk Elements

               1.     Nonaccrual, Past Due and Restructured Loans
                      The following table presents aggregate amounts for
                      nonaccrual loans, restructured loans, other real estate
                      owned, net and accruing loans which are contractually past
                      due ninety days or more as to interest or principal
                      payments.
<TABLE>
<CAPTION>

                                               ======================================================
                                                                   December 31,
                                               ------------------------------------------------------
($ in thousands)                                 2001       2000      1999       1998       1997
- -----------------------------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>       <C>        <C>
Nonaccrual loans:
  Commercial and industrial                    $  175     $   65     $  65     $  ---      $   55
  Real estate mortgage                             11          5        33         28          32
  Real estate construction                        ---        ---       ---        ---         ---
  Loans to individuals                            168         18        53        ---         ---
- -----------------------------------------------------------------------------------------------------
                                               $  354     $   88     $ 151     $   28      $   87
- -----------------------------------------------------------------------------------------------------
Restructured loans:
  Commercial and industrial                       ---        ---        40        ---         ---
- -----------------------------------------------------------------------------------------------------
Total nonperforming loans                      $  354     $   88     $ 191     $   28      $   87
Other real estate owned, net                      211        540       447        628         421
- -----------------------------------------------------------------------------------------------------
Total nonperforming assets                     $  565     $  628     $ 638     $  656      $  508
                                               ======================================================
- -----------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more:
  Commercial and industrial
  Real estate mortgage                         $  303     $  242     $  99     $  186      $   82
  Real estate construction                        277        664       704        160         358
  Loans to individuals                            ---        ---       ---        ---         ---
                                                  400        415       274        204         232
- -----------------------------------------------------------------------------------------------------
                                               $  980     $1,321    $1,077     $  550      $  672
=====================================================================================================
</TABLE>

                      The effect of nonaccrual and restructured loans on
interest income is presented below:

                                =====================================
($ in thousands)                   2001        2000         1999
=====================================================================
Scheduled interest:
  Nonaccrual loans              $    37     $    11     $    13
  Restructured loans                ---         ---         ---
                                -------------------------------------
     Total scheduled interest   $    37     $    11     $    13
                                -------------------------------------
Recorded interest:
  Nonaccrual loans              $     7     $   ---     $   ---
  Restructured loans                ---         ---         ---
                                -------------------------------------
     Total recorded interest    $     7     $   ---     $   ---
=====================================================================

                      Interest is recognized on the cash basis for all loans
                      carried in nonaccrual status. Loans generally are placed
                      in nonaccrual status when the collection of principal or
                      interest is ninety days or more past due, unless the
                      obligation is both well-secured and in the process of
                      collection.

                                       24
<PAGE>



               2.     Potential Problem Loans

                      At December 31, 2001, management was unaware of any
                      potential problem loans other than those presented in the
                      table above.

               3.     Foreign Outstandings

                      At December 31, 2001, 2000 and 1999, there were no foreign
                      outstandings.

               4.     Loan Concentrations

                      The Company does a general banking business, serving the
                      commercial, agricultural and personal banking needs of its
                      customers. NBB's trade territory consists of the northern
                      portion of Montgomery County, all of Giles County, all of
                      Pulaski County, the City of Radford, the City of Galax and
                      adjacent portions of Carroll and Grayson Counties,
                      Virginia. NBB's operating results are closely correlated
                      with the economic trends within this area which are, in
                      turn, influenced by the area's three largest employers,
                      Virginia Polytechnic Institute and State University,
                      Montgomery County Schools and Celco. Other industries
                      include a wide variety of manufacturing, retail and
                      service concerns. Much of BTC's business originates from
                      the communities of Tazewell and Bluefield and other
                      communities in Tazewell County, Virginia and in Mercer
                      County, West Virginia. BTC also serves the counties of
                      Wythe, Smyth and Washington in Virginia. BTC's primary
                      service area has largely depended on the coal mining
                      industry and farming for its economic base. In recent
                      years, coal companies have mechanized and reduced the
                      number of persons engaged in the production of coal. There
                      are still a number of support industries for the coal
                      mining business that continue to provide employment in the
                      area. Additionally, several new businesses have been
                      established in the area and Bluefield, West Virginia has
                      emerged as a regional medical center. The ultimate
                      collectibility of the loan portfolios and the recovery of
                      the carrying amounts of repossessed property are
                      susceptible to changes in the market conditions of these
                      areas.

                      At December 31, 2001 and 2000, approximately $177 million
                      and $151 million, respectively, of the loan portfolio were
                      concentrated in commercial real estate. This represents
                      approximately 44% and 42% of the loan portfolio at
                      December 31, 2001 and 2000, respectively. Included in
                      commercial real estate at December 31, 2001 and 2000 was
                      approximately $101 million and $84 million, respectively,
                      in loans for college housing and professional office


                                       25
<PAGE>


                      buildings. Loans secured by residential real estate were
                      approximately $119 million and $110 million at December
                      31, 2001 and 2000, respectively. This represents
                      approximately 30% and 31% of the loan portfolio at
                      December 31, 2001 and 2000, respectively. Loans secured by
                      automobiles were approximately $32 million and $36 million
                      at December 31, 2001 and 2000, respectively. This
                      represents approximately 8% of the loan portfolio at
                      December 31, 2001 and 10% at December 31, 2000.

                      The Company has established operating policies relating to
                      the credit process and collateral requirements in loan
                      originations. Loans to purchase real and personal property
                      are generally collateralized by the related property and
                      with loan amounts established based on certain percentage
                      limitations of the property's total stated or appraised
                      value. Credit approval is primarily a function of
                      collateral and the evaluation of the creditworthiness of
                      the individual borrower or project based on available
                      financial information.

                                       26
<PAGE>


 IV.     Summary of Loan Loss Experience

         A.     Analysis of the Allowance for Loan Losses
                The following tabulation shows average loan balances at the end
                of each period; changes in the allowance for loan losses arising
                from loans charged off and recoveries on loans previously
                charged off by loan category; and additions to the allowance
                which have been charged to operating expense:
<TABLE>
<CAPTION>

                                            ============================================================================
                                                                           December 31,
                                            ----------------------------------------------------------------------------
($ in thousands)                               2001           2000            1999           1998           1997
========================================================================================================================
<S>                                         <C>            <C>             <C>            <C>            <C>
Average net loans outstanding               $ 376,958      $ 310,624       $ 266,431      $ 225,613      $ 204,540
                                            ============================================================================
- ------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year                $   3,886      $   3,231       $   2,679      $     438      $   2,575

Charge-offs:
 Commercial and industrial loans                  141             55             185             32            257
 Real estate mortgage loans                        32            ---              33             80            ---
 Real estate construction loans                   ---            ---             ---            ---            ---
 Loans to individuals                             955            715             760            526            422
                                            ----------------------------------------------------------------------------
 Total loans charged off                    $   1,128      $     770       $     978      $     638      $     679
                                            ----------------------------------------------------------------------------
Recoveries:
 Commercial and industrial loans                    8              3              51            ---             70
 Real estate mortgage loans                       ---            ---               1              2            ---
 Real estate construction loans                   ---            ---             ---            190            ---
 Loans to individuals                              98             93              78             63             37
                                            ----------------------------------------------------------------------------
 Total recoveries                           $     106      $      96       $     130      $     255      $     107
                                            ----------------------------------------------------------------------------
Net loans charged off                           1,022            674             848            383            572
                                            ----------------------------------------------------------------------------
Additions charged to operations                 1,408          1,329           1,400            624            435
                                            ----------------------------------------------------------------------------
Balance at end of year                      $   4,272      $   3,886       $   3,231      $   2,679      $   2,438
                                            ============================================================================
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average net loans
 Outstanding                                     0.27%          0.21%           0.32%          0.17%          0.28%
=========================================================================================================================
</TABLE>


                Factors influencing management's judgment in determining the
                amount of the loan loss provision charged to operating expense
                include the quality of the loan portfolio as determined by
                management, the historical loan loss experience, diversification
                as to type of loans in the portfolio, the amount of secured as
                compared with unsecured loans and the value of underlying
                collateral, banking industry standards and averages, and general
                economic conditions.

                                       27
<PAGE>



 B.      Allocation of the Allowance for Loan Losses

The allowance for loan losses has been allocated according to the amount deemed
necessary to provide for anticipated losses within the categories of loans for
the years indicated as follows:
<TABLE>
<CAPTION>

            ========================================================================================================================
                                                                                December 31,
            ------------------------------------------------------------------------------------------------------------------------
                     2001                     2000                    1999                    1998                   1997
            ------------------------------------------------------------------------------------------------------------------------

                           Percent                 Percent                 Percent                 Percent                 Percent
                             of                      of                      of                      of                      of
                          Loans in                Loans in                Loans in                Loans in                Loans in
                            Each                    Each                    Each                    Each                    Each
 ($ in        Allowance  Category to  Allowance  Category to  Allowance  Category to  Allowance  Category to  Allowance  Category to
  thousands)   Amount    Total Loans    Amount   Total Loans   Amount    Total Loans   Amount    Total Loans   Amount    Total Loans
====================================================================================================================================
<S>          <C>        <C>          <C>        <C>          <C>        <C>          <C>        <C>          <C>        <C>
Commercial
 and
 industrial
 loans          $557       47.43%       $ 255       45.29%     $ 555       50.35%      $ 222        45.75%      $ 213       46.18%
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate
 mortgage
 loans            50       19.33%         120       19.66%       119       19.83%         73        20.17%         67       19.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate
 construction
 loans           ---        4.89%         ---        4.62%       ---        4.94%        ---         5.31%        ---        3.88%
- ------------------------------------------------------------------------------------------------------------------------------------
Loans to
 individuals   2,909       28.35%       1,709       30.43%       978       24.88%        497        28.77%        416       30.36%
- ------------------------------------------------------------------------------------------------------------------------------------
Unallocated      756                    1,802                  1,579                   1,887                    1,742
- ------------------------------------------------------------------------------------------------------------------------------------
              $4,272      100.00%     $ 3,886      100.00%   $ 3,231      100.00%    $ 2,679       100.00%    $ 2,438      100.00%
            ========================================================================================================================
</TABLE>

                                       28
<PAGE>


Loan Loss Allowance

  The adequacy of the allowance for loan losses is based on management's
judgement and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit as well as other
internal and external factors such as general economic conditions.

  The evaluation of the allowance for loan losses is performed by the internal
credit review department.

  Guidance for the evaluations performed are established by the regulatory
authorities who periodically review the results for compliance.

  As a part of this process, loans are grouped into principally two classes. The
first involves loans that are individually reviewed and direct allocations made
based on collateral values, financial statements of the borrower, their cash
flow capabilities to repay, and other documentation. In addition, an estimate is
made for losses inherent to this portfolio.

  The second class includes pools of loans. Allocations from this analysis are
derived and based on historical loss averages.

  The unallocated portion of the allowance for loan losses is the residual
amount after allocation to the above classes.

  As previously stated, adequacy of the allowance for loan losses is subject to
periodic regulatory review. These reviews cover the allocation process and
overall adequacy of the allowance for loan losses. Regulatory authorities at
their discretion may set minimum levels for the allowance and/or require the
charge-off of loans as a result of their examination. This independent grading
process by regulators serves as a standard to gauge the effectiveness of the
internal credit review.

                                       29
<PAGE>


V.      Deposits

        A.     Average Amounts of Deposits and Average Rates Paid

               Average amounts and average rates paid on deposit categories in
               excess of 10% of average total deposits are presented below:
<TABLE>
<CAPTION>

                     =======================================================================
                                                  December 31,
                     -----------------------------------------------------------------------
                              2001                    2000                   1999
                     -----------------------------------------------------------------------
                                   Average                Average                 Average
                       Average      Rates      Average     Rates      Average      Rates
 ($ in thousands)      Amounts       Paid      Amounts      Paid      Amounts       Paid
- --------------------------------------------------------------------------------------------
<S>                  <C>         <C>         <C>        <C>         <C>         <C>
Noninterest-bearing
 demand deposits      $ 66,793       ---     $ 56,709       ---      $55,700        ---

Interest-bearing
 demand deposits       116,529      2.16%      85,713      2.62%      85,284       2.50%

Savings deposits        47,175      1.95%      43,138      2.63%      46,792       2.59%

Time deposits          338,642      5.71%     248,113      5.71%     203,807       5.22%

- --------------------------------------------------------------------------------------------
Average total
 deposits             $569,139      4.53%    $433,673      4.64%    $391,583       4.16%
============================================================================================
</TABLE>


        B.     Time Deposits of $100,000 or More

               The following table sets forth time certificates of deposit and
               other time deposits of $100,000 or more:
<TABLE>
<CAPTION>

                                =====================================================================
                                                         December 31, 2001
                                =====================================================================
                                                 Over 3 Months   Over 6 Months
                                   3 Months        Through 6      Through 12    Over 12
($ in thousands)                   or Less          Months          Months      Months       Total
=====================================================================================================
<S>                               <C>            <C>              <C>         <C>          <C>
Certificates of
 deposit                            $65,246         $81,198         $90,281     $85,085     $321,810
- -----------------------------------------------------------------------------------------------------
Other time deposits                  49,764          59,665          69,060      66,107      244,596
- -----------------------------------------------------------------------------------------------------
  Total time
   deposits of
   $100,000 or more                 $15,482         $21,533         $21,221     $18,978      $77,214
=====================================================================================================
</TABLE>

                                       30
<PAGE>


 VI.    Return on Equity and Assets

        The ratio of net income to average stockholders' equity and to average
        total assets, and certain other ratios are presented below:

                                    ========================================
                                                  December 31,
                                    ----------------------------------------
                                           2001         2000          1999
============================================================================
Return on average assets                   1.15%         1.46%        1.56%
- ----------------------------------------------------------------------------
Return on average equity(1)               11.53%        13.13%       12.61%
- ----------------------------------------------------------------------------
Dividend payout ratio                     41.29%        40.87%       39.70%
- ----------------------------------------------------------------------------
Average equity to average assets(1)        9.98%        11.13%       12.37%
============================================================================

        (1)    Includes amount related to common stock subject to ESOP put
               option excluded from stockholders' equity on the Consolidated
               Balance Sheet for 1999.


Item 2.  Properties
- -------------------

  Bankshares' headquarters and one branch office of NBB is located at 101
Hubbard Street, Blacksburg, Virginia. NBB's Main Office is at 100 South Main
Street, Blacksburg, Virginia. In addition to the Bank's Main Office location and
the Hubbard Street branch office, NBB owns eleven branch offices in Virginia:
four in the Town of Blacksburg; one in the Town of Christiansburg; and three in
the County of Giles, two in Pulaski County, one in the City of Radford and one
in the City of Galax. An additional tract of land has been acquired for the
construction of a fourteenth branch.

  Bank of Tazewell County owns the land and building of nine of its eleven
offices. The bank leases the land and building for two offices. The Main Office
is located at 309 East Main Street, Tazewell, Virginia. Three additional
branches are located in Tazewell, one in Richlands and three are located in
Bluefield, Virginia. The bank also has one branch in Wytheville, Virginia, one
branch in Abingdon, Virginia and one branch in Marion, Virginia. Management
believes that its existing facilities are adequate to meet present needs and any
anticipated growth.

  NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC utilizes this same system for data processing.


Item 3.  Legal Proceedings
- --------------------------

  Bankshares, NBB, BTC, and NBFS are not currently involved in any material
pending legal proceedings, other than routine litigation incidental to NBB's and
BTC's banking business.


Item 4.  Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------

  None

                                       31
<PAGE>


                      Executive Officers of the Registrant

Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 9, 2002.

The following is a list of names and ages of all executive officers of
Bankshares; their terms of office as officers; the positions and offices within
Bankshares held by each officer; and each person's principal occupation or
employment during the past five years.

================================================================================
                                                                Year Elected an
Name                 Age    Offices and Positions Held          Officer/Director
================================================================================
James G. Rakes        57  Chairman, President and Chief              1986
                          Executive Officer, National
                          Bankshares, Inc.; and President and
                          Chief Executive Officer of The
                          National Bank of Blacksburg since
                          1983. President and Treasurer of
                          National Bankshares Financial
                          Services, Inc. since 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J. Robert Buchanan    50  Treasurer, National Bankshares, Inc.;      1998
                          Cashier and Senior Vice
                          President/Chief Financial Officer of
                          The National Bank of Blacksburg, since
                          January 1, 1998; prior thereto Senior
                          Vice President, Treasurer and Chief
                          Financial Officer, Premier Bankshares
                          Corporation.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Marilyn B. Buhyoff    53  Secretary & Counsel, National              1989
                          Bankshares, Inc.; and Secretary &
                          Counsel since 1989 and Senior Vice
                          President/ Administration, since 1992,
                          of The National Bank of Blacksburg.
                          Secretary of National Bankshares
                          Financial Services, Inc. since 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F. Brad Denardo       49  Corporate Officer, National                1989
                          Bankshares, Inc.; and Executive Vice
                          President/ Loans since 1989 of The
                          National Bank of Blacksburg.
- --------------------------------------------------------------------------------

                                       32
<PAGE>

- --------------------------------------------------------------------------------
Cameron L. Forrester  53  Corporate Officer, National                2001
                          Bankshares, Inc.; and President and
                          Chief Executive Officer of Bank of
                          Tazewell County since 1998; prior
                          thereto Vice President of First
                          Virginia Bank, Clinch Valley (formerly
                          Premier Bank, N. A.)
================================================================================

Except for J. Robert Buchanan and Cameron Forrester, each of the executive
officers above have served Bankshares and/or its subsidiaries in the listed
executive capacity for the past five years.

                                       33
<PAGE>


                                     Part II
                                     -------

Item 5.  Market for Registrant's Common Equity and Related
- ----------------------------------------------------------
Stockholder Matters
- -------------------

  Effective December 1, 1999, National Bankshares, Inc.'s common stock began
trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to December
1, 1999, National Bankshares, Inc.'s common stock was traded on a limited basis
in the over-the-counter market and was not listed on any exchange or quoted on
Nasdaq. As of December 31, 2001 there were 1,045 stockholders of Bankshares
common stock.

  Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 11 of Bankshares' 2001 Annual
Report to Stockholders and is incorporated herein by reference. Prices prior to
December 1, 1999 do not necessarily reflect the prices which would have
prevailed had there been an active trading market, nor do they reflect
unreported trades, which may have been at lower or higher prices.


Item 6.  Selected Financial Data
- --------------------------------

  The table entitled "Selected Consolidated Financial Data" on page 4 of
Bankshares' 2001 Annual Report to Stockholders is incorporated herein by
reference.


Item 7. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
- -------------------------

  The information contained under "Management's Discussion and Analysis" on
pages 5 through 11 of Bankshares' 2001 Annual Report to Stockholders is
incorporated herein by reference.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------

  See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Sensitivity" on pages
5 through 6 and the section "Derivatives and Market Risk Exposures" on page 10
of Bankshares' 2001 Annual Report to Stockholders and is incorporated herein by
reference.


                                       34
<PAGE>


Analysis of Interest Rate Sensitivity

The following discussion of interest rate sensitivity contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking statements.




                                       35
<PAGE>



 The Company uses simulation analysis to forecast its balance sheet and monitor
interest rate sensitivity. One test used by Bankshares is shock analysis which
measures the effect of a hypothetical, immediate and parallel shifts in interest
rates. The following table shows the results of a rate shock of 100, 200, and
300 basis points and the effects on net income and return on average assets and
return on average equity at December 31, 2001.

<TABLE>
<CAPTION>

                         ($ in thousands, except for percent data)
- ---------------------------- ------------------------ -------------------------- --------------------------------
      Rate Shift                   Net Income          Return on Average Equity     Return on Average Assets
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
<S> <C>                      <C>                       <C>                       <C>
           300                      $8,501                    12.24%                         1.24%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
           200                       9,766                    13.95%                         1.42%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
           100                      10,904                    15.47%                         1.58%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
       (-) 100                      13,263                    18.55%                         1.93%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
       (-) 200                      13,616                    19.01%                         1.98%
- ---------------------------- ------------------------ -------------------------- --------------------------------
</TABLE>

 Simulation analysis allows the Company to test asset and liability management
strategies under rising and falling rate conditions. As a part of simulation
process, certain estimates and assumptions must be made dealing with but, not
limited to, asset growth, the mix of assets and liabilities, rate environment,
local and national economic conditions. Assets growth and the mix of assets can
to a degree be influenced by management. Other areas such as the rate
environment and economic factors cannot be controlled. For this reason actual
results may vary materially from any particular forecast or shock analysis.

 This shortcoming is offset to a degree by the periodic reforecasting of the
balance sheet to reflect current trends and economic conditions. Shock analysis
must also be updated periodically as a part of the asset and liability
management process.


Item 8.  Financial Statements and Supplementary Data
- ----------------------------------------------------

  The following consolidated financial statements of the Registrant and the
Independent Auditor's Report set forth on pages 12 through 36 of Bankshares'
2001 Annual Report to Stockholders are incorporated herein by reference:


                                       36
<PAGE>


1. Independent Auditor's Report

2.  Consolidated Balance Sheets - December 31, 2001 and 2000

3.  Consolidated Statements of Income - Years ended December 31, 2001, 2000
    and 1999

4.  Consolidated  Statements of Changes in  Stockholders'  Equity - Years
    ended December 31, 2001, 2000 and 1999

5.  Consolidated Statements of Cash Flows - Years ended December 31, 2001,
    2000 and 1999

6.  Notes to Consolidated Financial Statements - December 31, 2001, 2000
    and 1999


Item 9.  Changes In and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------

None

                                    Part III
                                    --------


Item 10.  Directors and Executive Officers of the Registrant
- ------------------------------------------------------------

  Executive Officers of Bankshares as of December 31, 2001 are listed on page 32
herein.

  Information with respect to the directors of Bankshares is set out under the
caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy
Statement dated March 14, 2002 which information is incorporated herein by
reference.


Item 11.  Executive Compensation
- --------------------------------

  The information set forth under "Executive Compensation" on pages 4 through 6
of Bankshares' Proxy Statement dated March 14, 2002 is incorporated herein by
reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------

  The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "Stock Ownership of Certain Beneficial Owners" and "Stock
Ownership of Directors and Executive Officers" on pages 1 and 2 of Bankshares'
Proxy Statement dated March 14, 2002 is incorporated herein by reference.


Item 13.  Certain Relationships and Related Transactions
- --------------------------------------------------------

  The information contained under "Certain Transactions With Officers and
Directors" on page 13 of Bankshares' Proxy Statement dated March 14, 2002 is
incorporated herein by reference.

                                       37
<PAGE>



                                     Part IV
                                     -------


Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------

(a) The following documents are filed as part of this report:


                                                       2001 Annual Report
    1.     Financial Statements:                     To Stockholders Page(s)*
           --------------------                      ------------------------

           Independent Auditor's Report                         12
             Consolidated Balance Sheets -                      13
             December 31, 2001 and 2000

           Consolidated Statements of                           14
             Income - Years ended December
             31, 2001, 2000 and 1999


           Consolidated Statements of Changes                   15
             in Stockholders' Equity - Years
             ended December 31, 2001, 2000 and
             1999

           Consolidated Statements of Cash                      16
             Flows - Years ended December 31,
             2001, 2000 and 1999

           Notes to Consolidated                               17-35
             Financial Statements - December
             31, 2001, 2000 and 1999

    2.     Financial Statement Schedules:
           -----------------------------

           None

*Incorporated by reference from the indicated pages of the 2001 Annual Report to
 Stockholders.

    3.         Exhibits:
               --------
                                                               Page No. in
Exhibit No.                Description                      Sequential System
- -----------                -----------                      -----------------
   3(i)       Articles of Incorporation, as amended, of    (incorporated
              National Bankshares, Inc.                    herein by
                                                           reference to
                                                           Exhibit 3(a) of
                                                           the Annual Report on
                                                           Form 10-K for
                                                           Fiscal year ended
                                                           December 31, 1993)

                                       38
<PAGE>

                                                               Page No. in
Exhibit No.                Description                      Sequential System
- -----------                -----------                      -----------------

   4(i)      Specimen copy of certificate for National     (incorporated
             Bankshares, Inc. common stock, $2.50 par      herein by
             value                                         reference to
                                                           Exhibit 4(a) of
                                                           the Annual Report on
                                                           Form 10-K for
                                                           Fiscal year ended
                                                           December 31, 1993)
   4(i)      Article Four of the Articles of               (incorporated
             Incorporation of National Bankshares, Inc.    herein by
             included in Exhibit No. 3(a))                 reference to
                                                           Exhibit 4(b) of
                                                           the Annual Report on
                                                           Form 10-K for
                                                           Fiscal year ended
                                                           December 31, 1993)
 10(ii)(B)   Computer software license agreement dated     (incorporated
             June 18, 1990, by and between Information     herein by
             Technology, Inc. and The National Bank of     reference to
             Blacksburg                                    Exhibit 10(e) of
                                                           the Annual Report on
                                                           Form 10-K for
                                                           Fiscal year ended
                                                           December 31, 1992)
*10(iii)(A)  Employment Agreement dated January 1, 1992,   (incorporated
             by and between National Bankshares, Inc. and  herein by
             James G. Rakes                                reference to
                                                           Exhibit 10(a) of
                                                           the Annual Report on
                                                           Form 10-K for
                                                           Fiscal year ended
                                                           December 31, 1992)
*10(iii)(A)  Capital Accumulation Plan (included in        (incorporated
             Exhibit No. 10(a))                            herein by
                                                           reference to
                                                           Exhibit 10(b) of
                                                           the Annual Report on
                                                           Form 10-K for
                                                           Fiscal year ended
                                                           December 31, 1992)
*10(iii)(A)  Employee Lease Agreement dated May 7, 1992,   (incorporated
             by and between National Bankshares, Inc.      herein by
             and The National Bank of Blacksburg           reference to
                                                           Exhibit 10(c) of
                                                           the Annual Report on
                                                           Form 10-K for
                                                           Fiscal year ended
                                                           December 31, 1992)


                                       39
<PAGE>


                                                               Page No. in
Exhibit No.                Description                      Sequential System
- -----------                -----------                      -----------------

*10(iii)(A)  National Bankshares, Inc. 1999 Stock Option   (incorporated
             Plan                                          herein    by
                                                           reference  to Exhibit
                                                           4.3 of the   Form
                                                           S-8,   filed  as
                                                           Registration   No.
                                                           333-79979 with the
                                                           Commission  on June
                                                           4, 1999)

   13(i)     2001 Annual Report to Stockholders (such Report, except to the
             extent incorporated herein by reference, is being furnished
             for the information of the Commission only and is not deemed
             to be filed as part of this Report on Form 10-K)



   21(i)     Subsidiaries of National Bankshares, Inc.
   23.1      Consent of Yount, Hyde & Barbour, P.C. to
             incorporation by reference of independent auditor's report
             included in this Form 10-K, into registrant's registration
             statement on Form S-8.
   23.2      Consent of KPMG LLP to incorporation by
             reference of independent auditors' report
             included in this Form 10-K, into
             registrant's registration statement on Form
             S-8.
    99       Independent Auditors' Report of KPMG LLP on
             consolidated financial statements of
             National Bankshares, Inc. and subsidiaries
             for the year ended December 31, 1999.




*Indicates a management contract or compensatory plan required to be filed
herein.

(b) Reports on Form 8-K filed during the last quarter of the period covered by
    --------------------------------------------------------------------------
    this report:
    ------------

    None

(c) Exhibits required by Item 601 of Regulation S-K:
    -----------------------------------------------

    See Item 14(a)3 above.


                                       40
<PAGE>



(d) Financial Statement Schedules required by Regulation S-X:
    --------------------------------------------------------

    See Item 14(a)2 above.


                                       41
<PAGE>


                                   Signatures
                                   ----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, National Bankshares, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
National Bankshares, Inc.

                             BY:    /s/ James G. Rakes
                                    --------------------------------------
                                    James G. Rakes, Chairman,
                                    President and Chief Executive Officer

                             DATE:  March 28, 2002
                                    -------------------------------------


                             BY:    /s/ J. Robert Buchanan
                                    -------------------------------------
                                    J. Robert Buchanan
                                    Treasurer (Principal Financial Officer)

                             DATE:  March 28, 2002
                                    -------------------------------------

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

Name                             Date                Title
- ----                             ----                -----

/s/ L.A. Bowman                  March 13, 2002     Director
- ------------------------         --------------
L. A. Bowman

/s/ A. A. Crouse                 March 13, 2002     Director
- ------------------------         --------------
A. A. Crouse

/s/ J. A. Deskins, Sr.           March 13, 2002     Director
- ------------------------         --------------
J. A. Deskins, Sr.

/s/ P. A. Duncan                 March 13, 2002     Director
- ------------------------         --------------
P. A. Duncan

/s/ C. L. Forrester              March 13, 2002     Director
- ------------------------         --------------
C. L. Forrester

/s/ W. T. Peery                  March 13, 2002     Director
- ------------------------         --------------
W. T. Peery

/s/ J. G. Rakes                  March 13, 2002     Chairman of the Board
- ------------------------         --------------     President and Chief
J. G. Rakes                                         Executive Officer -
                                                    National Bankshares, Inc.

/s/ J. M. Shuler                 March 13, 2002     Director
- ------------------------         --------------
J. M. Shuler

/s/ J. R. Stewart                March 13, 2002     Director
- ------------------------         --------------
J. R. Stewart


                                       43
<PAGE>



                                Index to Exhibits
                                -----------------
                                                               Page No. in
Exhibit No.                    Description                  Sequential System
- -----------                    -----------                  -----------------
   3(i)       Articles of Incorporation, as amended, of      (incorporated
              National Bankshares, Inc.                      herein by
                                                             reference to
                                                             Exhibit 3(a) of
                                                             the Annual Report
                                                             on Form 10-K for
                                                             fiscal year ended
                                                             December 31, 1993)
   4(i)       Specimen copy of certificate for National      (incorporated
              Bankshares, Inc. common stock, $2.50 par       herein by
              value                                          reference to
                                                             Exhibit 4(a) of
                                                             the Annual Report
                                                             on Form 10-K for
                                                             fiscal year ended
                                                             December 31, 1993)
   4(i)       Article Fourth of the Articles of              (incorporated
              Incorporation of National Bankshares, Inc.     herein by
              included in Exhibit No. 3(a))                  reference to
                                                             Exhibit
                                                             4(b) of the
                                                             Annual
                                                             Report on
                                                             Form 10-K
                                                             for fiscal
                                                             year ended
                                                             December
                                                             31, 1993)
 10(ii)(B)    Computer software license agreement dated      (incorporated
              June 18, 1990, by and between Information      herein by
              Technology, Inc. and The National Bank of      reference to
              Blacksburg                                     Exhibit 10(e) of
                                                             the Annual Report
                                                             on Form 10-K for
                                                             fiscal year ended
                                                             December 31, 1992)
*10(iii)(A)   Employment Agreement dated January 1, 1992,    (incorporated
              by and between National Bankshares, Inc. and   herein by
              James G. Rakes                                 reference to
                                                             Exhibit
                                                             10(a) of
                                                             the Annual
                                                             Report on
                                                             Form 10-K
                                                             for fiscal
                                                             year ended
                                                             December
                                                             31, 1992)
*10(iii)(A)   Capital Accumulation Plan (included in         (incorporated
              Exhibit No. 10(a))                             herein by
                                                             reference to
                                                             Exhibit 10(b) of
                                                             the Annual Report
                                                             on Form 10-K for
                                                             fiscal year ended
                                                             December 31, 1992)


                                       44
<PAGE>


                                                               Page No. in
Exhibit No.                    Description                  Sequential System
- -----------                    -----------                  -----------------
*10(iii)(A)   Employee Lease Agreement dated May 7, 1992,    (incorporated
              by and between National Bankshares, Inc. and   herein by
              The National Bank of Blacksburg                reference to
                                                             Exhibit 10(c) of
                                                             the Annual Report
                                                             on Form 10-K for
                                                             fiscal year ended
                                                             December 31, 1992)
*10(iii)(A)   National Bankshares, Inc. 1999 Stock Option    (incorporated
              Plan                                           herein by reference
                                                             to Exhibit  4.3 of
                                                             the   Form   S-8,
                                                             filed  as
                                                             Registration   No.
                                                             333-79979 with the
                                                             Commission  on June
                                                             4, 1999)
   13(i)      2001 Annual Report to Stockholders (such Report, except to
              the extent incorporated herein by reference, is being
              furnished for the information of the Commission only and
              is not deemed to be filed as part of this Report on Form
              10-K)



   21(i)      Subsidiaries of National Bankshares, Inc.
   23.1       Consent of Yount, Hyde & Barbour, P.C. to
              incorporation by reference of independent auditor's report
              included in this Form 10-K, into registrant's registration
              statement on Form S-8.
   23.2       Consent of KPMG LLP to incorporation by
              reference of independent auditors' report
              included in this Form 10-K, into registrant's
              registration statement on Form S-8.
    99        Independent Auditor's Report of KPMG LLP on
              consolidated financial statements of National
              Bankshares, Inc. and subsidiaries for the
              year ended December 31, 1999.

* Indicates a management contract or compensatory plan required to be filed
herein.

                                       45
<PAGE>


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>ex99.txt
<DESCRIPTION>INDEPENDENT AUDITOR'S REPORT
<TEXT>
                                                    Exhibit 99










                          Independent Auditors' Report


The Board of Directors and Stockholders
National Bankshares, Inc.:


We have audited the accompanying consolidated statements of income, changes in
stockholders' equity, and cash flows of National Bankshares, Inc. and
subsidiaries for the year ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
National Bankshares, Inc. and subsidiaries for the year ended December 31, 1999,
in conformity with accounting principles generally accepted in the United States
of America.


                                  /s/ KPMG LLP


Roanoke, Virginia
February 11, 2000




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>ex231.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
               Exhibit 23.1





                            Consent of Independent Auditors




               The Board of Directors
               National Bankshares, Inc.

               We consent to incorporation by reference in Registration
               Statement No. 333-79979 on Form S-8 of National Bankshares, Inc.
               of our report dated January 23, 2002, relating to the
               consolidated balance sheets of National Bankshares, Inc. and
               subsidiaries as of December 31, 2001 and 2000, and the related
               consolidated statements of income, changes in stockholders'
               equity, and cash flows for the years then ended, which report is
               included in the December 31, 2001 Annual Report on Form 10-K of
               National Bankshares, Inc.


               /s/Yount, Hyde & Barbour, P.C.


               Winchester, Virginia
               March 29, 2002




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>ex232.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
                                                            Exhibit 23.2










                         Consent of Independent Auditors


The Board of Directors
National Bankshares, Inc.:


We consent to incorporation by reference in Registration Statement No. 333-79979
on Form S-8 of National Bankshares, Inc. of our report dated February 11, 2000,
relating to the consolidated statements of income, changes in stockholders'
equity, and cash flows of National Bankshares, Inc. and subsidiaries for the
year ended December 31, 1999, which report is included in the December 31, 2001
Annual Report on Form 10-K of National Bankshares, Inc.


                                  /s/ KPMG LLP


Roanoke, Virginia
March 29, 2002



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>7
<FILENAME>annual2001.txt
<DESCRIPTION>2001 ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
                              National Bankshares



























                               2001 Annual Report

<PAGE>


Mission Statement

National Bankshares, Inc. strives to be an exceptional community bank holding
company dedicated to providing shareholder value by offering financial services
to customers through subsidiary financial institutions and affiliated companies
in an efficient, friendly, personalized and cost-effective manner. We recognize
that to do this, our financial institutions must retain the ability to make
decisions locally and must actively participate in the communities they serve.
We are committed to offering competitive and fair employment opportunities and
to maintaining the highest standards in all aspects of our business.


Contents
- --------------------------------------------------------------------------------
1     Financial Highlights
2     To Our Stockholders
4     Selected Consolidated Financial Data
5     Management's Discussion and Analysis
12    Independent Auditor's Report
13    Consolidated Financial Statements
17    Notes to Consolidated Financial Statements (unaudited)
36    Selected Quarterly Data
38    Boards of Directors
40    Corporate Information
- --------------------------------------------------------------------------------


<PAGE>


Financial Highlights

($ In thousands, except per share data)       2001          2000         1999
- --------------------------------------------------------------------------------

Net income                               $    7,314          7,309        7,088
Basic and diluted net income per share         2.08           2.08         1.96
Cash dividends per share                       0.86           0.85         0.80
Book value per share                          18.59          17.04        14.99

Loans, net                               $  394,042        355,795      291,562
Total securities                            191,476        156,344      137,492
Total assets                                644,623        593,497      472,134
Total deposits                              576,618        530,648      407,187
Stockholders' equity                         65,261         59,834       52,723
- --------------------------------------------------------------------------------


Graph of "Cash Dividends Per Share"
(dollars)

      2001            2000            1999            1998            1997
- ---------------- --------------- --------------- --------------- ---------------
      .86             .85             .80             .74             .68



Graph of "Book Value Per Share" (1)
(dollars)

      2001            2000            1999            1998            1997
- ---------------- --------------- --------------- --------------- ---------------
     18.59           17.04            14.99           16.00           14.73

(1) Includes the amount related to common stock subject to ESOP put option
    excluded from stockholders' equity on the Consolidated Balance Sheets in
    1998 and 1997.


                                       1
<PAGE>


To Our Stockholders

                                 Photographs of
             "Bank of Clinch Valley" "Green Hotel" "Bank of Graham"
                                  Photo Caption
"Top to bottom: Bank of Clinch Valley on Main Street in Tazewell, early 1900's;
  Green Hotel, NBB's first building, early 1900's; Inside the Bank of Graham in
                                Bluefield, 1920."

        For National Bankshares, 2001 was a year of accomplishments achieved
during a time of challenges. Following rather quickly on the acquisition in late
2000 of six branch offices from AmSouth Bank, Bank of Tazewell County closed the
purchase of the Bluefield, Virginia office of First Union National Bank on March
8. With this purchase, BTC consolidated its already strong position in the
growing Bluefield market. In addition, we were able to utilize some of that
bank's excess capital to expand our core business, community banking. Throughout
the year we have focused on profitably integrating the seven new locations into
existing operations at The National Bank and Bank of Tazewell County. Employee
training went well, and new customers were patient with changes. Now that the
transition is complete, we are working to capitalize on the opportunities
offered in these new and expanded markets.

National Bankshares Financial Services
        Another highlight of the past year was the formation of a new corporate
subsidiary. National Bankshares Financial Services, Inc. is doing business
throughout Southwest Virginia as National Bankshares Investment Services and
National Bankshares Insurance Services. Through a partnership with UVEST
Investment Services, National Bankshares Investment Services offers individuals
who are not bank Trust Department customers the opportunity to invest in
annuities, stocks, bonds and mutual funds. National Bankshares Insurance
Services provides competitive pricing and excellent service on a full range of
personal and business insurance products. We believe that we can now
conveniently meet all of the financial and insurance needs of our community bank
customers, and at the same time provide new sources of income for the holding
company.

A Challenging Year
        The business environment last year offered unique challenges. The
Federal Reserve Bank's eleven interest rate cuts compressed interest margins
while our banks made adjustments. The recession and no-interest car loans
negatively affected consumer loan demand. Turmoil in the financial markets after
the September 11 terrorist attacks made choosing good investments very
difficult. I am pleased to report to you that our employees successfully met
these and many other challenges, and we were able to post positive earnings that
slightly exceeded 2000 totals.


                                       2
<PAGE>


                                 Photographs of
              "Farmers Bank of Clinch Valley" "NBB's Main Office"
                         "Hubbard Street Headquarters"
                                  Photo Caption
"Top to bottom: Farmers Bank of Clinch Valley, circa 1933; Architect's rendition
  of NBB's Main Office, 1942; National Bankshares Hubbard Street Headquarters,
                                     1999."

Summary Of Results
        Net income for 2001 was $7.314 million, as compared with $7.309 million
for 2000. Total assets of National Bankshares at December 31, 2001 were $664.62
million, versus $593.49 million for the comparable period in 2000, an increase
of 8.61%. Net loans at year-end were at $394.04 million, 10.75% higher than last
year. Stockholders received a cash dividend of $0.86 per share for 2001, as
compared with $0.85 last year.

Continuing The Tradition
    Both of our bank subsidiaries have long histories of successfully surviving
and thriving in difficult days. The National Bank celebrated its 110th
anniversary last May, and Bank of Tazewell County is even older, tracing its
history back to a charter issued to Clinch Valley Bank in 1889. Clinch Valley
Bank, later Farmers Bank of Clinch Valley, merged in 1964 with Bank of Graham to
become Bank of Tazewell County. While we all have been dealing with the
emotional and financial effects of the September 11 attacks on our nation and
with the war on terrorism, I cannot help but think of bankers from previous
generations who worked to keep our local communities strong and prosperous as
our country faced other serious challenges. We intend to continue in their
tradition. We will work hard to provide quality hometown banking with a modern
outlook. We are grateful for the support of our stockholders, the loyalty of
customers and the hard work of directors, officers and employees. Thank you for
your investment and confidence in National Bankshares, Inc.

Picture of                              /s/ James G. Rakes
"James G. Rakes"
                                        James G. Rakes
                                        Chairman of the Board
                                        President and Chief Executive Officer


                                       3
<PAGE>


<TABLE>
<CAPTION>

Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,

                                                    2001        2000      1999       1998     1997
- ---------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>       <C>       <C>       <C>

Selected Income Statement Data:
Interest income                                 $   45,527     38,358    33,603    31,828    29,797
Interest expense                                    22,771     18,163    14,203    13,928    13,106
Net interest income                                 22,756     20,195    19,400    17,900    16,691
Provision for loan losses                            1,408      1,329     1,400       624       435
Noninterest income                                   5,204      4,082     3,512     3,174     2,834
Noninterest expense                                 16,953     12,876    11,868    11,061    10,031
Income taxes                                         2,285      2,763     2,556     2,591     2,499
Net income                                           7,314      7,309     7,088     6,798     6,560

Per Share Data:
Basic and diluted net income                    $     2.08       2.08      1.96      1.79      1.73
Cash dividends declared                               0.86       0.85      0.80      0.74      0.68
Book value per share(1)                              18.59      17.04     14.99     16.00     14.73

Selected Balance Sheet Data at Year End:
Loans, net                                      $  394,042    355,795   291,562   236,578   214,552
Total securities                                   191,476    156,344   137,492   166,754   149,974
Total assets                                       644,623    593,497   472,134   445,166   402,907
Total deposits                                     576,618    530,648   407,187   382,696   344,867
Stockholders' equity                                65,261     59,834    52,723    58,503    54,029

Selected Balance Sheet Daily Averages:
Loans, net                                      $  380,970    310,624   266,431   225,613   204,540
Total securities                                   188,809    142,686   151,424   152,432   157,179
Total assets                                       635,692    500,381   454,189   420,988   395,932
Total deposits                                     569,139    433,673   391,583   359,970   339,439
Stockholders' equity(1)                             63,460     55,682    56,196    58,282    53,712

Selected Ratios:
Return on average assets                             1.15%      1.46%     1.56%     1.61%     1.66%
Return on average equity(1)                         11.53%     13.13%    12.61%    11.66%    12.21%
Dividend payout ratio                               41.29%     40.87%    39.70%    41.29%    39.31%
Average equity to average assets(1)                  9.98%     11.13%    12.37%    13.84%    13.57%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes the amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets in 1998
and 1997.


                                       4
<PAGE>


Management's Discussion and Analysis

($ In thousands, except per share data)

Performance Summary
Net income in 2001 for National Bankshares, Inc. (Bankshares) and its
wholly-owned subsidiaries, The National Bank of Blacksburg (NBB), Bank of
Tazewell County (BTC), and National Bankshares Financial Services, Inc., (the
Company), was $7,314, an increase of $5 or 0.07% over the previous year. This
produced a return on average assets and a return on average equity of 1.15% and
11.53%, respectively.
      Net income for the Company for 2000 was $7,309, an increase of $221 or
3.12% over 1999. The return on average assets and return on average equity for
2000 were 1.46% and 13.13%, respectively. While 2000 net income increased 3.12%,
total asset growth increased at a rate of approximately 26%, resulting in a
6.41% decline in the return on average assets.
      Basic net income per share over the three-year period was $1.96 per share
in 1999 compared to $2.08 in 2000 and 2001. The dividend payout ratio for 2001
was 41.29%, which compares to 40.87% in 2000 and 39.70% in 1999.

Net Interest Income
Net interest income for 2001 was $22,756, an increase of $2,561 or 12.68%. The
net interest margin for 2001 was 4.11%, a 42 basis point decrease from 2000.
      These results were in part caused by the rising interest rate environment
that existed throughout 2000, which steadily increased interest expense until
January 2001. In January 2001, the Federal Reserve Bank initiated a series of
interest rate reductions to stimulate the faltering national economy. The
falling rate environment began to benefit the Company immediately, though the
full effect of this trend is not expected to be realized until some point in the
future.

Graph of "Net Income"
(in millions)

      2001            2000            1999            1998            1997
- ---------------- --------------- --------------- --------------- ---------------
      7.3             7.3             7.1             6.8             6.6


      A second factor that affected the interest rate margin was
acquisition activity. In late 2000, the Company purchased six branches from
AmSouth Bank . While the assumption of the interest expense was immediate, it
was not possible to channel the new funds immediately into the loan portfolio
due to economic conditions. Surplus funds, instead, were placed in the lower
yielding investment portfolio. Accordingly, interest expense grew at a faster
rate than interest income, adversely affecting the net interest margin.
      Net interest income for 2000 was $20,195, an increase of $795 or 4.10%
over 1999. The net interest margin on earning assets for 2000 was 4.53% and
4.82% in 1999. The yield on earning assets for 2000 was 8.36%, down 18 basis
points from the previous year. At the same time the cost to fund earning assets,
which was 3.83%, increased 50 basis points. This produced a net decrease in the
net interest margin of 32 basis points. This decrease was due primarily to the
rising interest rate environment that occurred in 2000.

Interest Rate Sensitivity
The Company considers interest rate risk to be a significant market risk and has
systems in place to measure the exposure of net interest income and fair market
values to adverse movement in interest rates. Interest rate sensitivity analyses
provides management with information related to repricing opportunities, while
interest rate shock simulations indicate potential economic loss due to future
interest rate changes.
               During 1999 and 2000 interest rates rose substantially. In
addition to the adverse effects on the net interest margin, the rising rates
reduced the Company's ability to respond to interest rate movements. At December
31, 2000, the Company's investment portfolio contained a substantial amount of
longer-term securities with call features. Due to the higher interest rate
levels the call features of these securities were not exercised. At the time,
the net unrealized losses made the sale of the securities impractical, thereby
depriving management of one of its primary means of controlling the effects of
interest rate changes.
               With the onset of the declining rate environment that began in
January 2001, both of these problems began to abate. Interest expense, which had
been at high levels at the beginning of 2001, declined rapidly and market values
of the securities rebounded, making the sale of the securities feasible, if
deemed necessary.
               Management anticipates that the net interest margin will continue
to improve into 2002. In addition to the contribution to net income made by
lower deposit rates, the ongoing economic recovery may provide an opportunity to
rechannel investments in securities into the higher yielding loan portfolio. Any
improvement in performance, however, is contingent upon the pace and extent to
which the economy ultimately recovers.


                                       5
<PAGE>


    As previously stated, the Company uses simulation analysis to forecast its
balance sheet and monitor interest rate sensitivity. One test is a shock
analysis that measures the effect of a hypothetical, immediate, and parallel
shift in interest rates. The following table shows the results of a rate shock
and the effects on net income and return on average assets and return on average
equity projected at December 31, 2002.

($ in thousands, except for percent data)

    Rate Shift      Net            Return on              Return on
(Basis Points)     Income        Average Equity        Average Assets
- -------------------------------------------------------------------------
      300         $ 8,501             12.24%                 1.24%
      200           9,766             13.95%                 1.42%
      100          10,904             15.47%                 1.58%
  (-) 100          13,263             18.55%                 1.93%
  (-) 200          13,616             19.01%                 1.98%
- -------------------------------------------------------------------------


Simulation analysis allows the Company to test asset and liability management
strategies under rising and falling rate conditions. As a part of the simulation
process, certain estimates and assumptions must be made. These include, but are
not limited to, asset growth, the mix of assets and liabilities, rate
environment, and local and national economic conditions. Asset growth and the
mix of assets can to a degree be influenced by management. Other areas, such as
the rate environment and economic factors, cannot be controlled. For this reason
actual results may vary materially from any particular forecast or shock
analysis.
      This shortcoming is offset to a degree by the periodic re-forecasting of
the balance sheet to reflect current trends and economic conditions. Shock
analysis must also be updated periodically as a part of the asset and liability
management process.
      This data indicates that the Company's performance is vulnerable to sudden
changes in interest rates. This can also be seen by the operating results in the
1999 to early 2001 period in which interest rates rose substantially, adversely
affecting net income.

Provision and Allowance for Loan Losses
The adequacy of the allowance for loan losses is based on management's judgement
and analysis of current and historical loss experience, risk characteristics of
the loan portfolio, concentrations of credit, and asset quality, as well as
other internal and external factors such as general economic conditions.
Changing trends in the loan mix are also evaluated in determining the adequacy
of the allowance for loan losses.
      An internal credit review department performs pre-credit analyses of large
credits and also conducts credit review activities that provide management with
an early warning of asset quality deterioration.
      Loan loss and other industry indicators related to asset quality are
presented in the Loan Loss Data table (following page). Nonperforming loans
include nonaccrual loans and restructured loans, but do not include accruing
loans past due 90 days or more.
      Nonperforming assets at December 31, 2001 were $ 565, a decrease of $ 63
or 10.03% from 2000. Net charge-offs to average net loans for 2001 was .27%. The
provision for loan losses for 2001 was $1,408, an increase of $79 or 5.94% from
2000. Overall asset quality, in management's opinion, remains satisfactory.
      Nonperforming assets for 2000 decreased $10 from 1999. Net charge-offs to
average net loans for the year 2000 were 0.21%, down from 0.31% 1999. The
provision for loan losses for 2000 declined by $71 or 5.07% from 1999.
      Management is unable to estimate when and under what exact terms existing
and future problem assets will be resolved. Changing economic conditions, the
timing and extent of changes, and the ultimate impact on the Company's asset
quality is not within management's ability to predict with any degree of
precision. In addition, precise loss predictions may be difficult to determine
because of the complex circumstances that surround troubled debts.

Noninterest Income
Noninterest income for 2001 was $5,204, an increase of $1,122 or 27.49% from
2000. The increase in most part was due to the acquisition of the six AmSouth
Bank branches in late 2000 and the purchase of a seventh branch from First Union
National Bank in the first quarter of 2001.
              Noninterest income for 2000 increased by $570 or 16.23% over 1999.
This increase was mostly due to increases in service charges on deposit
accounts, which grew because of acquisition activity.


                                       6
<PAGE>


<TABLE>
<CAPTION>

Loan Loss Data Table
($ In thousands)

                                                 2001                2000              1999
- ------------------------------------------ ------------------ ----------------- -----------------
<S>                                        <C>                <C>               <C>

Provision for loan losses                     $     1,408            1,329             1,400
Net charge-offs to average net loans                 0.27%            0.21%             0.31%
Allowance for loan losses to loans, net
  of unearned income and deferred fees               1.07%            1.08%             1.10%
Allowance for loan losses to
  nonperforming loans                             1206.78%        4,415.91%         1,691.62%
Allowance for loan losses to
  nonperforming assets                             756.11%          618.79%           506.43%
Nonperforming assets to loans, net of
  unearned income and deferred fees, plus
  other real estate owned                            0.14%            0.17%             0.22%
Nonaccrual loans                              $       354               88               151
Restructured loans                                    ---              ---                40
Other real estate owned, net                          211              540               447
- ------------------------------------------ ----------------- ----------------- -----------------
Total nonperforming assets                    $       565              628               638
========================================== ================= ================= =================
Accruing loans past due 90 days or  more      $       980            1,321             1,077
- ------------------------------------------ ----------------- ----------------- -----------------
</TABLE>

      Credit card income also increased substantially, primarily due to
      increased debit card activity. The level of service charges on deposits is
      driven by demand deposit volume, types of accounts opened,
service charge rates in effect, the level of charges such as overdraft fees, and
the fee waiver policy for these fees. Services charges on deposit accounts for
2001 were $2,246, an increase of $563 or 33.45% from 2000. The increase was
caused primarily by an increase in the number of deposit accounts resulting from
the purchase of six branches in late 2000 and a single branch purchase in the
first quarter of 2001. An increase in service charges and fees also contributed
to the increase, though to a lesser extent.
      Service charges on deposits for 2000 totaled $1,683, an increase of $288
or 20.65% from 1999. This increase was due primarily to volume, a portion of
which was due to the purchase of six AmSouth Bank branches.
      Other service charges and fees are comprised of safe deposit box rent,
charges associated with letters of credit, and other miscellaneous items. Due to
the nature of these charges they are subject to periodic fluctuation. In 2001
these charges were $306, down $42 from 2000. In 2000, these charges were $348,
an increase of $69 or 24.73% from 1999.
      Trust income is affected by several factors, including the number of
accounts managed, the average value of the accounts, and types of trust
accounts. In 2001 trust income was $1,091, an increase of $206 or 23.28% over
2000. This increase was mostly due to a higher level of estate business. Because
of its nature, estate business volume and the related income is not within
management's ability to predict and may fluctuate considerably from time to
time.
      Trust income for 2000 was $885, which represents a decrease of $42 or
4.53% over 1999. The decline was due in most part to a reduction in estate
business, which as previously mentioned, lacks predictability.
      Credit card income is composed of several types of fees and charges,
including transaction or interchange fees, merchant discount fees, and
over-limit charges. Credit card fees for 2001 were $1,227, an increase of $215
or 21.25% over 2000. This increase was caused in part by the purchase of six
branches, which expanded the company's service area, and to the introduction of
the Company's debit card service to BTC's trade area. In 2000, credit card
income totaled $1,012, an increase of $210 or 26.18% over 1999. The increase in
this category was attributable to an increase in debit card activity. Given the
highly competitive market, which limits the amount of set charges, revenue
increases result from growth in the number of merchant accounts processed and
increases in the number of customer credit and debit card accounts. These
increases result in higher transaction volume.
      Net realized gains for 2001 of $4 on available for sale securities were
primarily caused by the write down of the Company's investment in two limited
liability companies established for the sale of title insurance and insurance
services, offset by the call of a single bond in late 2001.
      Net realized securities gains were $9 in 2000, down $15 from 1999. Gains
and losses can occur as a result of portfolio restructuring, securities called
prior to maturity, and certain market adjustments.


                                       7
<PAGE>


Noninterest Expense
Noninterest expense for 2001 was $16,953, an increase of $4,077 or 31.66%. In
November of 2000 the Company purchased six AmSouth Bank branches. Since the
acquisition was in late 2000, the full effect on noninterest expense was not
realized until 2001. Categories such as salaries and benefits, occupancy,
intangibles, and other operating expense all increased because of these
acquisitions. Noninterest expense for 2001 also increased with the purchase of a
branch in March of 2001.
              Occupancy expense for 2001 was $1,715 an increase of $400 or
30.42% over the year 2000. Acquisition activity caused a majority of the
increase.
               In 2000, occupancy expense increased $163 or 14.15% again
primarily due to the acquisition of six branches in the fourth quarter of that
year.
      Data processing expenses for 2001 were $1,343, an increase of $412 or
44.25% over 2000. The acquisition of six AmSouth Bank branches late in 2000 and
the purchase of one branch in March 2001 were the primary contributors to the
increase.
      Data processing and ATM expense was $931 for 2000, an increase over 1999
of $42 or 4.72%. This increase is mostly attributable to a host computer
software upgrade and to the costs associated with the AmSouth acquisition.
      The cost of Federal Deposit Insurance increased by $26 or 30.23% from
2000. This increase was due in most part to the acquisition of deposits in the
previously mentioned branches.
      The cost of deposit insurance was $86 in 2000, an increase of $39 from
1999. While the banks' base premiums remain at the minimum required by law,
legislation enacted in late 1996 levied an assessment on banks for the purpose
of financing certain costs associated with the resolution of the savings and
loan crisis. This additional levy is expected to remain in effect until
2018-2019.
      Credit card processing costs for 2001 were $1,004, or a decrease of $21 or
2.05%. The decrease in costs was caused by a combination of factors. First,
volume increases were experienced with the addition of the previously mentioned
branches. In addition, the introduction of debit card services at the company's
BTC affiliate added to this expense. A onetime loss experienced in 2000, as
described below, offset the volume-related increases to produce the net
decrease.
      Credit card processing expense for 2000 was $1,025, an increase of $313 or
43.96% over 1999. Included in credit card expenses is approximately $192 in
losses incurred by the Company's NBB affiliate. The loss was the result of
charged-back items from a single merchant. The remainder of the increase was
attributable to volume.
      The net cost of other real estate owned includes expenses to acquire,
maintain, and dispose of foreclosed properties. Net gains and losses on
disposition are also included. During 2001 these expenses were $125 an increase
of $42 or 50.60%.
      Net costs of other real estate owned for 2000 were $83, an increase of $57
from 1999, due to the volume of properties handled.
      Other operating expenses for 2001 were $3,655, an increase of $808 or
28.38%. Most of the increase was the result of acquisition activities, which, as
expected, increased various categories such as telephone, courier service, and
stationery and supplies.
      Other operating expenses were $3,038 in 2000, up $82 or 2.77% from 1999,
which was primarily the result of increases in stationery and supplies,
telephone, and state franchise tax expense at BTC.

Income Taxes
Income tax expense decreased in 2001 because of the decline in income before
income tax expense and a higher level of investment in tax free obligations.
      Tax exempt interest income continues to be the primary difference between
the "expected" and reported income tax expense. The Company's effective tax
rates for 2001, 2000 and 1999 were 23.80%, 27.43% and 26.50%, respectively.
      See note 10 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.

Effects of Inflation
The Company's consolidated statements of income generally reflect the effects of
inflation. Since interest rates, loan demand, and deposit levels are related to
inflation, the resulting changes are included in net income. The most
significant item which does not reflect the effects of inflation is depreciation
expense, because historical dollar values used to determine this expense do not
reflect the effect of inflation on the market value of depreciable assets after
their acquisition.


                                       8
<PAGE>


Balance Sheet
Total assets for the Company were $644,623 at December 31, 2001. This represents
an increase of $51,126 or 8.61% over 2000. This increase resulted primarily from
the acquisition of a branch from First Union National Bank in March 2001. The
transaction included the acquisition of approximately $34,000 in deposits and
approximately $9,200 in loans.
      Total assets at year-end 2000 were $593,497, which represented an increase
of $121,363 or 25.71% over the previous year.
      The Company's primary methods of achieving growth are to seek increases in
deposits at its bank subsidiaries and to grow through corporate acquisitions and
mergers. In late 2000 the Company acquired six AmSouth Bank branches. The
transaction resulted in an increase of approximately $94,000 in deposits and
$42,000 in loans. The additional liquidity provided by the acquisition allowed
the Company to repay $10,000 in funds borrowed from the Federal Home Loan Bank.
At year-end 2000 the Company had a total of $42,669 in federal funds sold and
deposits in the Federal Home Loan Bank.

Graph of "Total Assets"
(in millions)

      2001            2000            1999            1998            1997
- ---------------- --------------- --------------- --------------- ---------------
     644.6           593.5            472.1           445.2           402.9

Loans
Loans, net of unearned income and deferred fees, grew by $38,633 or 10.74% in
2001. Of this amount approximately $9,200 was due to the First Union Bank branch
purchase referred to previously. The Company has, excluding purchased loans,
experienced moderately strong growth in 2001. Management expects internally
generated loan growth to increase as the overall economy recovers.
      Loans, net of unearned income and deferred fees, grew by $64,888 or 22.01%
in 2000. Commercial loans grew by $14,543 or 9.74%, with loans to individuals
increasing by $36,351 or 49.24%. Real estate mortgage loans grew by $12,334, an
increase of 20.97%. Real estate construction loans grew by 14.02%. This growth
was largely attributable to the AmSouth Bank acquisition, which added
approximately $42,000 to the loan portfolio.
      The Company engages in the origination and sale of mortgage loans in the
secondary market. In 2001 and 2000, the Company originated $28,247 and $20,129,
respectively, and sold $27,102 and $20,358 in 2001 and 2000, respectively, of
mortgage loans.

Graph of "Net Loans"
(in millions)

      2001            2000            1999            1998            1997
- ---------------- --------------- --------------- --------------- ---------------
     394.0           355.8            291.6           236.6           214.6

Securities
Securities available for sale at December 31, 2001 were $ 88,667. This
represents a decrease of $35,118 or 28.37% from December 31, 2000. Securities
held to maturity increased $70,250 or 215.76% when the two periods are compared.
The increased emphasis on held to maturity securities portfolio represents an
effort to manage the level of unrealized gains and losses, which have fluctuated
substantially in the past three years. New volume was the result of the
previously discussed branch acquisitions.
      At December 31, 2001, net unrealized securities gains net of deferred tax
expense were $566. This is compared to ($575) at December 31, 2000. This
increase was primarily due to the declining rate environment experienced in
2001.
      With the completion of the AmSouth transaction and because of aggressive
deposit procurement efforts, the Company generated excess liquidity in 2000. A
portion of these excess funds was invested in the available for sale portfolio,
which increased by $9,940 or 8.73%, and a portion was invested in the held to
maturity category, which increased by $8,912 or 37.69%.
      As previously mentioned, the net unrealized loss in the available for sale
portfolio decreased significantly in 2000. At December 31, 2000, net unrealized
securities loss, net of deferred tax benefit, was approximately ($575) compared
to ($3,453) at December 31, 1999. The Company's investment policy stresses
safety, with a program of purchasing high quality securities such as U.S.
Treasury and U.S. Government agency issues, state, county, and municipal bonds,
corporate bonds, mortgage-backed securities, and other bank qualified
investments. The Company has classified all of its investment securities as
either held to maturity or available for sale, as the Company does not engage in
trading activities.
      At December 31, 2001 and 2000, the Company had no investment
concentrations in any single issues (excluding U.S. Government) that exceeded
ten percent of capital.

                                       9
<PAGE>


Deposits
At December 31, 2001, total deposits were $576,618, an increase of $45,970 or
8.66% over December 31, 2000. Approximately $34,000 of this increase was
attributable to the First Union National Bank purchase which has been previously
discussed.
      As a result of aggressive marketing efforts and the acquired branches,
total deposits grew by $123,461 or 30.32% in 2000. The AmSouth purchase
accounted for approximately $94,000 of the increase.

Derivatives and Market Risk Exposures
The Company is not a party to derivative financial instruments with off-balance
sheet risks such as futures, forwards, swaps and options. The Company is a party
to financial instruments with off-balance sheet risks such as commitments to
extend credit, standby letters of credit, and recourse obligations in the normal
course of business to meet the financing needs of its customers. See note 14 of
Notes to Consolidated Financial Statements for additional information relating
to financial instruments with off-balance sheet risk. Management does not plan
any involvement in the future in high risk derivative products. The Company has
investments in mortgage-backed securities, principally GNMA's, with a fair value
of approximately $27,111, which includes $1,397 of structured notes. In
addition, the Company has investments in nonmortgage-backed structured notes
with fair value of approximately $1,801. See note 3 of Notes to Consolidated
Financial Statements for additional information relating to securities.
      The Company's securities and loans are subject to credit and interest rate
risk, and its deposits are subject to interest rate risk. Management considers
credit risk when a loan is granted and monitors credit risk after the loan is
granted. The Company maintains an allowance for loan losses to absorb losses in
the collection of its loans. See note 5 of Notes to Consolidated Financial
Statements for information relating to the allowance for loan losses. See note
15 of Notes to Consolidated Financial Statements for information relating to
concentrations of credit risk. The Company has an asset/liability program to
help manage its interest rate risk. This program provides management with
information related to the rate sensitivity of certain assets and liabilities
and the effect of changing rates on profitability and capital accounts. While
this planning process is designed to protect the Company over the long-term, it
does not provide near-term protection from interest rate shocks, as interest
rate sensitive assets and liabilities do not, by their nature, move up or down
in tandem in response to changes in the overall rate environment. The Company's
profitability in the near term may be temporarily affected, either positively by
a falling interest rate scenario or negatively by a period of rising rates. See
note 16 of Notes to Consolidated Financial Statements for information relating
to fair value of financial instruments and comments concerning interest rate
sensitivity.

Liquidity
Liquidity is the ability to provide sufficient cash flow to meet financial
commitments and to fund additional loan demand or withdrawal of existing
deposits. Sources of liquidity include deposits, loan principal and interest
repayments, sales, calls and maturities of securities, and short-term
borrowings. The Company maintained an adequate liquidity level during 2001 and
2000.
      The Company's liquidity position remained satisfactory throughout 2001.
The acquisition of the First Union National Bank branch in March 2001 further
enhanced liquidity, which was already satisfactory following the late 2000
acquisition of the AmSouth branches. The most significant use of funds was in
securities purchases. The primary sources of funds were the purchased branch
deposits and an increase in the other deposits category.
      Net cash from operating activities for 2001 was $10,017, up from $9,691 in
2000.
      Cash used in investing activities was $47,987, down from $113,774 in 2000.
Purchases of loans and federal funds sold declined substantially from 2000. This
corresponded to a substantial increase in cash provided by financing activities
in 2000 which was due to acquisition activity.
      In 2000, the Company's liquidity greatly improved. In the first half of
2000 the Company aggressively marketed its deposit products. In the fourth
quarter it acquired the six AmSouth Bank branches. This allowed the Company to
repay a $10,000 advance from the Federal Home Loan Bank and to end 2000 with
$42,669 in federal funds sold and deposits in the Federal Home Loan Bank. Net
cash from operating activities of $9,691 in 2000 decreased by $1,757 from 1999,
primarily due to the decrease in accrued interest receivable and the decrease in
mortgage loans held for sale. Net cash flows provided by operating activities
and financing activities for 2000 of $9,691 and $101,902 respectively, were used
primarily to fund loan growth.
      Management is not aware of any other commitments or events that will
result in, or are reasonably likely to result in, a material and adverse
decrease in liquidity.

                                       10
<PAGE>


Capital Resources
Total stockholder's equity increased by $5,427 or 9.07% for the year 2001.
Growth was the result of net income of $7,314, offset by dividends to
shareholders of $3,020. Stock in the amount of $8, was repurchased.
      Total stockholders' equity increased by $7,111 or 13.49% in the year 2000.
Growth was the result of net income of $7,309, offset by dividends to
shareholders of $2,987. Accumulated comprehensive income increased by $2,878.
Stock in the amount of $89 was repurchased.
      Banks are required to apply percentages to various assets, including
off-balance sheet assets, to reflect their perceived risk. Regulatory defined
capital is divided by risk weighted assets in determining the banks' risk-based
capital ratios. No regulatory authorities have advised National Bankshares,
Inc., the National Bank of Blacksburg, or Bank of Tazewell County of any
specific leverage ratios applicable to them. National Bankshares, Inc., the
National Bank of Blacksburg, and Bank of Tazewell County's capital adequacy
ratios exceed regulatory requirements and provide added flexibility to take
advantage of business opportunities as they arise. See note 12 of Notes to
Consolidated Financial Statements for additional information.

Recent Accounting Pronouncements
      See note 1 of Notes to Consolidated Financial Statements for information
relating to recent accounting pronouncements.

Branch Acquisitions
On November 8, 2000 the Company acquired six branches of AmSouth Bank of
Birmingham, Alabama (AmSouth). Approximately $42,000 in loans and $94,000 in
deposits were acquired. Three of the six branches, located in Radford, Pulaski,
and Dublin, Virginia, are being operated by the Company's NBB affiliate. The
remaining three, located in Wytheville, Abingdon, and Marion, Virginia, are
being operated by the Company's BTC affiliate.
      In another move to improve the Company's competitive position, BTC
acquired a branch in Bluefield, Virginia from First Union National Bank on March
8, 2001. The acquisition involved the purchase of approximately $34,000 in
deposits and $9,200 in loans.

Common Stock Information and Dividends
    Effective December 1, 1999, National Bankshares, Inc.'s common stock began
trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to December
1, 1999, National Bankshares, Inc.'s common stock was traded on a limited basis
in the over-the-counter market and was not listed on any exchange or quoted on
Nasdaq. As of December 31, 2001, there were 1,045 stockholders of Bankshares
common stock. The following is a summary of the market price per share, and cash
dividend per share of the common stock of National Bankshares, Inc. for 2001 and
2000.


                       2001               2000          Dividends per share
                -----------------  -------------------  -------------------
                  High      Low      High       Low         2001    2000
- -------------   --------  -------  ---------  --------     ------  ------
First Quarter   $ 20.25    18.00    $ 20.50    18.75         ---     ---
- -------------
Second Quarter    20.80    17.80      19.00    15.50        0.43    0.42
- --------------
Third Quarter     24.60    20.00      17.50    16.06         ---     ---
- -------------
Fourth Quarter    23.00    20.10      18.75    15.125       0.43    0.43
- --------------  --------  -------  ---------  --------     ------  ------


    Bankshares' primary source of funds for dividend payments is dividends from
its subsidiaries, The National Bank of Blacksburg and Bank of Tazewell County.
Bank regulatory agencies restrict dividend payments of the subsidiaries as more
fully disclosed in note 11 of Notes to Consolidated Financial Statements.


                                       11
<PAGE>


Independent Auditors' Report

The Board of Directors and Stockholders
National Bankshares, Inc.
Blacksburg, Virginia

We have audited the accompanying consolidated balance sheets of National
Bankshares, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of National Bankshares, Inc. for the year ended December 31, 1999
were audited by other auditors whose report, dated February 11, 2000, expressed
an unqualified opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the 2001 and 2000 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
National Bankshares, Inc. and subsidiaries as of December 31, 2001 and 2000 and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.







Winchester, Virginia
January 23, 2002


                                       12
<PAGE>


<TABLE>
<CAPTION>

Consolidated Balance Sheets

$ In thousands, except per share data. December 31, 2001 and 2000.

                                                                                2001         2000
- -------------------------------------------------------------------------- ------------- -------------
<S>                                                                        <C>           <C>
Assets
Cash and due from banks                                                      $  12,293        11,130
Interest-bearing deposits                                                       15,510        13,579
Federal funds sold                                                               1,080        29,090
Securities available for sale                                                   88,667       123,785
Securities held to maturity (fair value approximates $103,234 at
December 31, 2001 and $32,602 at December 31, 2000)                            102,809        32,559
Mortgage loans held for sale                                                     1,145           ---
Loans:
  Real estate construction loans                                                19,573        16,726
  Real estate mortgage loans                                                    77,339        71,163
  Commercial and industrial loans                                              189,764       163,929
  Loans to individuals                                                         113,413       110,176
                                                                           ------------- -------------
    Total loans                                                                400,089       361,994
  Less unearned income and deferred fees                                        (1,775)       (2,313)
                                                                           ------------- -------------
    Loans, net of unearned income and deferred fees                            398,314       359,681
  Less allowance for loan losses                                                (4,272)       (3,886)
                                                                           ------------- -------------
    Loans, net                                                                 394,042       355,795
                                                                           ------------- -------------
Bank premises and equipment, net                                                10,132        10,324
Accrued interest receivable                                                      4,917         5,049
Other real estate owned                                                            211           540
Intangible assets and goodwill, net                                             11,866         9,038
Other assets                                                                     1,951        2,608
                                                                           ------------- -------------
    Total assets                                                             $ 644,623       593,497
                                                                           ============= =============

Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits                                          $  71,751        60,165
Interest-bearing demand deposits                                               134,230       101,257
Savings deposits                                                                48,827        42,560
Time deposits                                                                  321,810       326,666
    Total deposits                                                             576,618       530,648
Other borrowed funds                                                               203           270
Accrued interest payable                                                         1,101         1,538
Other liabilities                                                                1,440         1,207
                                                                           ------------- -------------
    Total liabilities                                                          579,362       533,663
                                                                           ------------- -------------
Stockholders' equity:
  Preferred stock of no par value. Authorized 5,000,000 shares;
    none issued and outstanding                                                    ---           ---
  Common stock of $2.50 par value. Authorized 5,000,000 shares;
    issued and outstanding 3,511,377 in 2001 and 3,511,877 shares in 2000        8,778         8,780
  Retained earnings                                                             55,917        51,629
  Accumulated other comprehensive income (loss)                                    566          (575)
                                                                           ------------- -------------
    Total stockholders' equity                                                  65,261        59,834
                                                                           ------------- -------------
        Total liabilities and stockholders'equity                            $ 644,623       593,497
                                                                           ============= =============
- -------------------------------------------------------------------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       13
<PAGE>


<TABLE>
<CAPTION>

Consolidated Statements of Income

$ In thousands, except per share data. Years ended December 31, 2001, 2000 and
1999.


                                                                          2001           2000          1999
- --------------------------------------------------------------------- -------------- ------------- -------------
<S>                                                                   <C>            <C>           <C>

Interest Income
Interest and fees on loans                                                $ 33,456        28,326        24,105
Interest on federal funds sold                                                 652           338           170
Interest on interest-bearing deposits                                          577           689           269
Interest on securities - taxable                                             7,501         6,760         6,820
Interest on securities - nontaxable                                          3,341         2,245         2,239
                                                                      -------------- ------------- -------------
    Total interest income                                                   45,527        38,358        33,603
                                                                      -------------- ------------- -------------

Interest Expense
Interest on time deposits of $100,000 or more                                4,605         3,455         2,487
Interest on other deposits                                                  18,158        14,080        11,484
Interest on borrowed funds                                                       8           628           232
                                                                      -------------- ------------- -------------
    Total interest expense                                                  22,771        18,163        14,203
                                                                      -------------- ------------- -------------
    Net interest income                                                     22,756        20,195        19,400
Provision for loan losses                                                    1,408         1,329         1,400
                                                                      -------------- ------------- -------------
    Net interest income after provision for loan losses                     21,348        18,866        18,000
                                                                      -------------- ------------- -------------

Noninterest Income
Service charges on deposit accounts                                          2,246         1,683         1,395
Other service charges and fees                                                 306           348           279
Credit card fees                                                             1,227         1,012           802
Trust income                                                                 1,091           885           927
Other income                                                                   330           145            85
Realized securities gains, net                                                   4             9            24
                                                                      ------------- ------------- -------------
    Total noninterest income                                                 5,204         4,082         3,512
                                                                      ------------- ------------- -------------

Noninterest Expense
Salaries and employee benefits                                               8,085         6,360         6,048
Occupancy and furniture and fixtures                                         1,715         1,315         1,152
Data processing and ATM                                                      1,343           931           889
FDIC assessment                                                                112            86            47
Credit card processing                                                       1,004         1,025           712
Intangible assets and goodwill amortization                                    914           229           152
Net costs of other real estate owned                                           125            83            26
Other operating expenses                                                     3,655         2,847         2,842
                                                                      ------------- ------------- -------------
          Total noninterest expense                                         16,953        12,876        11,868
                                                                      ------------- ------------- -------------
Income before income tax expense                                             9,599        10,072         9,644
Income tax expense                                                           2,285         2,763         2,556
                                                                      ------------- ------------- -------------
      Net income                                                          $  7,314         7,309         7,088
                                                                      ============= ============= =============

      Basic and diluted net income per share                              $   2.08          2.08          1.96
                                                                      ============= ============= =============
- --------------------------------------------------------------------- -------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                       14
<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of Changes in Stockholders' Equity

$ In thousands, except per share data. Years ended December 31, 2001, 2000 and
1999.
                                                              Accumulated
                                                                 Other                 Common Stock
                                                               Comprehen-  Comprehen-   Subject to
                                       Common      Retained   sive Income     sive       ESOP Put
                                        Stock      Earnings      (Loss)      Income       Option       Total
- -----------------------------------  ------------ ----------- ------------ ----------- ------------ ------------
<S>                                  <C>          <C>         <C>          <C>         <C>          <C>

Balances, December 31, 1998             $ 9,482      50,182        1,019                   (2,180)      58,503
Net income                                  ---       7,088          ---       7,088          ---        7,088
Other comprehensive income:
  Unrealized holding losses on
    available for sale securities
    net of deferred taxes of $2,297         ---         ---          ---      (4,459)         ---          ---
  Less: reclassification adjustment,
    net of income taxes of $7               ---         ---          ---         (13)         ---          ---
                                                                           -----------
  Other comprehensive (loss), net
    of tax of ($2,304)                      ---         ---       (4,472)     (4,472)         ---       (4,472)
                                                                           -----------
Total comprehensive income, net
  of tax of $252                            ---         ---          ---       2,616          ---          ---
                                                                           ===========

Common stock repurchased                   (690)     (7,072)         ---                      ---       (7,762)
Cash dividends ($0.80 per share)            ---      (2,814)         ---                      ---       (2,814)
Change in common stock subject to
  ESOP put option                           ---         ---          ---                    2,180        2,180
                                     ------------ ----------- ------------             ------------ ------------
- ----------------------------------------------------------------------------------------------------------------

Balances, December 31, 1999             $ 8,792      47,384       (3,453)                     ---       52,723
Net income                                  ---       7,309          ---       7,309          ---        7,309
Other comprehensive income:
  Unrealized holding gains on
    available for sale securities net
    of deferred taxes of $1,486             ---         ---          ---       2,884          ---          ---
  Less: reclassification adjustment,
    net of income taxes of $3               ---         ---          ---          (6)         ---          ---
                                                                           -----------
  Other comprehensive income, net
    of tax of $1,483                        ---         ---        2,878       2,878          ---        2,878
                                                                           -----------
Total comprehensive income, net of
  tax of $4,246                             ---         ---          ---      10,187          ---          ---
                                                                           ===========

Common stock repurchased                    (12)        (77)         ---                      ---          (89)
Cash dividends ($0.85 per share)            ---      (2,987)         ---                      ---       (2,987)
                                     ------------ ----------- ------------             ------------ ------------
- ----------------------------------------------------------------------------------------------------------------

Balances, December 31, 2000             $ 8,780      51,629         (575)                     ---       59,834
Net income                                  ---       7,314          ---       7,314          ---        7,314
Other comprehensive income:
  Unrealized holding gains on
    available for sale securities net
    of deferred taxes of $588               ---         ---          ---       1,144          ---          ---
  Less: reclassification adjustment,
    net of income taxes of $1               ---         ---          ---          (3)         ---          ---
                                                                           -----------
  Other comprehensive income, net
    of tax of $587                          ---         ---        1,141       1,141          ---        1,141
                                                                           -----------
Total comprehensive income, net of
  tax of $2,872                             ---         ---          ---       8,455          ---
                                                                           ===========

Common stock repurchased                     (2)         (6)         ---                      ---           (8)
Cash dividends ($0.86 per share)            ---      (3,020)         ---                      ---       (3,020)
                                     ------------ ----------- ------------             ------------ ------------
- ----------------------------------------------------------------------------------------------------------------

Balance at December 31, 2001            $ 8,778      55,917          566                      ---       65,261
                                     ============ =========== ============             ============ ============
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       15
<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of Cash Flows

$ In thousands. Years ended December 31, 2001, 2000 and 1999.
                                                                  2001            2000           1999
- ------------------------------------------------------------ --------------- --------------- --------------
<S>                                                          <C>             <C>             <C>

Cash Flows from Operating Activities:
Net income                                                        $  7,314           7,309          7,088
Adjustments to reconcile net income to net cash provided
  by operating activities:
   Provision for loan losses                                         1,408           1,329          1,400
   Provision for deferred income taxes                                (166)           (253)          (214)
   Depreciation of bank premises and equipment                       1,106           1,015            903
   Amortization of intangibles                                         914             229            152
   Amortization of premiums and accretion of discounts, net            367             132            350
   (Gains) losses on sales and calls of securities
     available for sale, net                                            (4)              4            (20)
   Gains on calls of securities held to maturity, net                  ---             (13)            (4)
   Losses and writedowns on other real estate owned                     62              26            ---
   Originations of mortgage loans held for sale                    (28,247)        (20,129)       (31,538)
   Sales of mortgage loans held for sale                            27,102          20,358         33,489
   (Gains) losses on sale of fixed assets                               (2)             (4)            22
   Net change in:
     Accrued interest receivable                                       132          (1,035)          (237)
     Other assets                                                      235            (258)          (134)
     Accrued interest payable                                         (437)            887              4
       Other liabilities                                               233              94            187
                                                             --------------- --------------- --------------
       Net cash provided by operating activities                    10,017           9,691         11,448
                                                             --------------- --------------- --------------

Cash Flows from Investing Activities:
Net change in federal funds sold                                    28,010         (26,290)         2,290
Net change in interest-bearing deposits                             (1,931)         (4,360)        (2,192)
Proceeds from sales of securities available for sale                   ---             935          1,300
Proceeds from calls, maturities and principal repayments
of   securities available for sale                                  58,403           7,732         21,495
Proceeds from repayments of mortgage-backed securities
available for sale                                                   3,482           1,558          4,558
Proceeds from calls, maturities and principal repayments
of   securities held to maturity                                    24,160           3,192          6,997
Purchases of securities available for sale                         (25,209)        (15,914)       (12,190)
Purchases of securities held to maturity                           (94,602)        (12,117)           ---
Purchases of loan participations                                    (4,296)         (2,759)        (5,643)
Collections of loan participations                                   4,702           3,768          3,408
Loans purchased, including premium                                  (9,255)        (42,187)           ---
Loan originations and principal collections, net                   (31,740)        (24,869)       (54,456)
Proceeds from disposal of other real estate owned                    1,095             271            336
Recoveries on loans charged off                                        106              95            130
Additions to premises and equipment                                   (921)         (2,839)        (2,757)
Proceeds from sale of premises and equipment                             9              10              5
                                                             --------------- --------------- --------------
       Net cash used in investing activities                       (47,987)       (113,774)       (36,719)
                                                             --------------- --------------- --------------

Cash Flows from Financing Activities:
Deposits acquired, net of premium                                   29,862          85,944            ---
Net change in time deposits                                        (38,460)         40,031         22,709
Net change in other deposits                                        50,826         (10,807)         1,782
Net change in other borrowed funds                                     (67)        (10,190)        10,246
Cash dividends paid                                                 (3,020)         (2,987)        (2,814)
Common stock repurchase                                                 (8)            (89)        (7,762)
                                                             --------------- --------------- --------------
       Net cash provided by financing activities                    39,133         101,902         24,161
                                                             --------------- --------------- --------------
Net change in cash and due from banks                                1,163          (2,181)        (1,110)
Cash and due from banks at beginning of year                        11,130          13,311         14,421
                                                             --------------- --------------- --------------
Cash and due from banks at end of year                            $ 12,293          11,130         13,311
                                                             =============== =============== ==============

Supplemental Disclosures of Cash Flow Information:
Interest paid on deposits and borrowed funds                      $ 23,208          17,276         14,199
Income taxes paid                                                    2,383           2,958          2,941

Supplemental Disclosures of Noncash Investing Activities:
Loans charged against the allowance for loan losses                  1,129             770            978
Loans transferred to other real estate owned                           828             390            177
Unrealized gain (loss) on securities available for sale              1,728           4,361         (6,776)
                                                             =============== =============== ==============
- ------------------------------------------------------------ --------------- --------------- --------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
                                     16
<PAGE>



Notes to Consolidated Financial Statements

($ In thousands, except share data and per share data. December 31, 2001, 2000
and 1999.)

Note 1: Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of National
Bankshares, Inc. (Bankshares) and its wholly-owned subsidiaries, the National
Bank of Blacksburg (NBB), Bank of Tazewell County (BTC), and National Bankshares
Financial Services (NBFS), (the Company). All significant intercompany balances
and transactions have been eliminated in consolidation.
      The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. The following is a summary of the more
significant accounting policies.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks.

Securities

Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as "available for sale" and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.
      Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Declines in the fair value
of held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.

Loans

The Company grants mortgage, commercial, and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans. The
ability of the Company's debtors to honor their contracts is dependent upon the
real estate and general economic conditions in the Company's market area.
      Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff generally are reported at their
outstanding unpaid principal balances adjusted for the allowance for loan losses
and any deferred fees or costs on originated loans. Interest income is accrued
on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.
      The accrual of interest on mortgage and commercial loans is discontinued
at the time the loan is 90 days delinquent unless the credit is well-secured and
in process of collection. Credit card loans and other personal loans are
typically charged off no later than 180 days past due. In all cases, loans are
placed on nonaccrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
      All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.


                                       17
<PAGE>



      The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
      A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
      Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment disclosures.

Premises and Equipment

Premises and equipment are stated at cost, net of accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
on the straight-line basis. Depreciable lives include 40 years for premises,
3-10 years for furniture and equipment, and 5 years for computer software. Costs
of maintenance and repairs are charged to expense as incurred, and improvements
are capitalized.

Other Real Estate

Real estate acquired through, or in lieu of, foreclosure is held for sale and is
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other operating expenses.

Intangible Assets

Intangible assets and goodwill include deposit intangibles of $11,559 and $8,693
at December 31, 2001 and 2000, respectively, and goodwill of $307 and $345 at
December 31, 2001 and 2000, respectively. Deposit intangibles are being
amortized on a straight-line basis over a ten-year period and goodwill is being
amortized on a straight-line basis over a fifteen-year period.

Stock Option Plan

Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, whereby compensation cost is the excess,
if any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the stock.
Stock options issued under the Company's stock option plan have no intrinsic
value at the grant date, and under Opinion No. 25 no compensation cost is
recognized for them. The Company has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, has adopted the disclosure
requirements of SFAS No. 123.


                                       18

<PAGE>


Pension Plans

The Company sponsors two separate defined benefit pension plans, which cover
substantially all full-time officers and employees. The benefits are based upon
length of service and a percentage of the employee's compensation during the
final years of employment. Pension costs are computed based upon the provisions
of SFAS No. 87. The Company contributes to the pension plans amounts deductible
for federal income tax purposes.

Income Taxes

Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.

Trust Assets and Income

Assets (other than cash deposits) held by the Trust Departments in a fiduciary
or agency capacity for customers are not included in the consolidated financial
statements since such items are not assets of the Company. Trust income is
recognized on the accrual basis.

Earnings Per Share

Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury stock method.
    The following shows the weighted average number of shares used in computing
earnings per share and the effect on the weighted average number of shares of
dilutive potential common stock. Potential dilutive common stock had no effect
on income available to common shareholders.

<TABLE>
<CAPTION>


                                                                       2001           2000            1999
- ----------------------------------------------------------------- --------------- -------------- ---------------
<S>                                                               <C>             <C>            <C>
                                                                  --------------- -------------- ---------------
Average number of common shares outstanding                            3,511,380      3,514,586       3,607,669
Effect of dilutive options                                                 1,216            ---             ---
Average number of common shares outstanding used to
    calculate diluted earnings per share                               3,512,596      3,514,586       3,607,669
                                                                  =============== ============== ===============
- ----------------------------------------------------------------- --------------- -------------- ---------------
</TABLE>

In 2001, 2000 and 1999, stock options representing 4,125, 8,265 and 5,500
shares, respectively, were not included in the calculation of earnings per share
as their effect would have been anti-dilutive.

Advertising

The Company practices the policy of charging advertising costs to expenses as
incurred.


Use of Estimates

In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses and the valuation of foreclosed real estate and
deferred tax assets.
      Changing economic conditions, adverse economic prospects for borrowers, as
well as regulatory agency action as a result of examination, could cause NBB and
BTC to recognize additions to the allowance for loan losses and may also affect
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.


                                       19
<PAGE>


Comprehensive Income

Effective January 1, 2001, the Company changed its method of presentation
concerning comprehensive income. Prior to 2001, comprehensive income was
reflected as part of the consolidated statement of income. Comprehensive income
is now presented as a separate component of the Company's consolidated statement
of changes in stockholders' equity.

Reclassifications

Certain reclassifications have been made to prior period balances to conform to
the current year presentation.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued two statements,
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets, which will potentially impact the accounting for goodwill and
other intangible assets. SFAS No. 141 eliminates the pooling method of
accounting for business combinations and requires that intangible assets that
meet certain criteria be reported separately from goodwill. The Statement also
requires negative goodwill arising from a business combination to be recorded as
an extraordinary gain. SFAS No. 142 eliminates the amortization of goodwill and
other intangibles that are determined to have an indefinite life. The Statement
requires, at a minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life.
      Upon adoption of these Statements, an organization is required to
reevaluate goodwill and other intangible assets that arose from business
combinations entered into before July 1, 2001. If the recorded other intangible
assets do not meet the criteria for recognition, they should be classified as
goodwill. Similarly, if there are other intangible assets that meet the criteria
for recognition but were not separately recorded from goodwill, they should be
reclassified as goodwill. An organization also must reassess the useful lives of
intangible assets and adjust the remaining amortization periods accordingly. Any
negative goodwill must be written-off.
      The Company believes that the effects of these new pronouncements on its
financial statements will be minimal since all of the intangible assets arose
from branch acquisitions and will continue to be amortized over their estimated
lives in accordance with SFAS 72, Accounting for Certain Banking or Thrift
Institutions. The Statements generally are required to be implemented by the
Company in its 2002 financial statements.

Note 2: Restriction on Cash

As members of the Federal Reserve System, the Company's subsidiary banks are
required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 2001 and 2000, the aggregate
amounts of daily average required balances were approximated $2,458 and $1,523,
respectively.

Note 3: Securities

The amortized cost and fair value of securities available for sale, with gross
unrealized gains and losses, follows:

<TABLE>
<CAPTION>

                                                                       December 31, 2001
                                                        -------------------------------------------------
($ In thousands)                                                       Gross        Gross
                                                          Amortized  Unrealized   Unrealized
Available for sale:                                         Costs      Gains        Losses     Fair Value
- -------------------------------------------------------- ----------- ----------- ------------ ------------
<S>                                                      <C>         <C>         <C>          <C>
U.S. Treasury                                              $  6,248         242          ---        6,490
U.S. Government agencies and corporations                     5,340          43            8        5,375
States and political subdivisions                            51,030         605          446       51,189
Mortgage-backed securities                                   13,178         306           69       13,415
Corporate debt securities                                     9,066         143          116        9,093
Federal Home Loan Bank stock                                  1,411         ---          ---        1,411
Federal Reserve Bank stock                                      209         ---          ---          209
Other securities                                              1,328         157          ---        1,485
                                                         ----------- ----------- ------------ ------------
         Total securities available for sale               $ 87,810       1,496          639       88,667
                                                         =========== =========== ============ ============
- -------------------------------------------------------- ----------- ----------- ------------ ------------
</TABLE>



                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                        December 31, 2000
                                                         -------------------------------------------------
($ In thousands)                                                       Gross       Gross
                                                          Amortized  Unrealized  Unrealized
Available for sale:                                         Costs      Gains       Losses      Fair Value
- -------------------------------------------------------- ----------- ----------- ------------ ------------
<S>                                                      <C>         <C>         <C>          <C>
U.S. Treasury                                             $   6,246          85          ---        6,331
U.S. Government agencies and corporations                    54,815          87          868       54,034
States and political subdivisions                            35,456         395          245       35,606
Mortgage-backed securities                                   11,818          18           60       11,776
Corporate debt securities                                    14,341          63          346       14,058
Federal Home Loan Bank stock                                  1,329         ---          ---        1,329
Federal Reserve Bank stock                                      209         ---          ---          209
Other securities                                                442         ---          ---          442
                                                         ----------- ----------- ------------ ------------
         Total securities available for sale              $ 124,656         648        1,519      123,785
                                                         =========== =========== ============ ============
- -------------------------------------------------------- ----------- ----------- ------------ ------------
</TABLE>

The amortized cost and fair value of single maturity securities available for
sale at December 31, 2001, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2001.


                                                   December 31, 2001
                                             ------------------------------
($ In thousands)                                Amortized         Fair
                                                  Costs          Values
- -------------------------------------------- ---------------- -------------
Due in one year or less                         $  3,411          3,474
Due after one year through five years             19,391         20,029
Due after five years through ten years            25,622         25,596
Due after ten years                               36,438         36,463
Equity securities                                  2,948          3,105
                                             ---------------- -------------
                                                $ 87,810         88,667
                                             ================ =============
- -------------------------------------------- ---------------- -------------


The amortized costs and fair value of securities held to maturity, with gross
unrealized gains and losses, follows:

<TABLE>
<CAPTION>

                                                             December 31, 2001
                                               ----------------------------------------------
($ In thousands)                                              Gross       Gross
                                                 Amortized  Unrealized  Unrealized    Fair
Held to maturity:                                  Costs      Gains       Losses      Value
- ---------------------------------------------- ----------- ----------- ----------- ----------
<S>                                            <C>         <C>         <C>         <C>

U.S. Government agencies and corporations       $  17,025          95          29     17,091
     States and political subdivisions             49,230         319         381     49,168
     Mortgage-backed securities                    13,723         123         150     13,696
     Corporate debt securities                     22,831         579         131     23,279
                                               ----------- ----------- ----------- ----------
       Total securities held to maturity        $ 102,809       1,116         691    103,234
                                               =========== =========== =========== ==========
- ---------------------------------------------- ----------- ----------- ----------- ----------
</TABLE>

<TABLE>
<CAPTION>

                                                             December 31, 2000
                                               ----------------------------------------------
($ In thousands)                                              Gross       Gross
                                                 Amortized  Unrealized  Unrealized    Fair
Held to maturity:                                Costs       Gains       Losses      Value
- ---------------------------------------------- ----------- ----------- ----------- ----------
<S>                                            <C>         <C>         <C>         <C>
U.S. Government agencies and corporations       $   8,500           8         195      8,313
        States and political subdivisions          17,288         207           4     17,491
        Mortgage-backed securities                    288           5         ---        293
        Corporate debt securities                   6,483          29           7      6,505
                                               ----------- ----------- ----------- ----------
           Total securities held to maturity    $  32,559         249         206     32,602
                                               =========== =========== =========== ==========
- ---------------------------------------------- ----------- ----------- ----------- ----------
</TABLE>


                                       21
<PAGE>


The amortized costs and fair values of single maturity securities held to
maturity at December 31, 2001, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2001.

                                                    December 31, 2001
                                              ------------------------------
($ In thousands)                                 Amortized         Fair
                                                   Costs          Values
- --------------------------------------------- --------------- --------------
Due in one year or less                            $   2,624          2,657
Due after one year through five years                 20,881         21,537
Due after five years through ten years                40,741         40,693
Due after ten years                                   38,563         38,347
                                              --------------- --------------
        Total                                      $ 102,809        103,234
                                              =============== ==============
- --------------------------------------------- --------------- --------------

      At December 31, 2001 and 2000, securities with a carrying value of $30,800
and $48,810, respectively, were pledged to secure public and trust deposits and
for other purposes as required or permitted by law.
      As members of the Federal Reserve and the Federal Home Loan Bank (FHLB) of
Atlanta, NBB and BTC are required to maintain certain minimum investments in the
common stock of those entities. Required levels of investment are based upon NBB
and BTC's capital and a percentage of qualifying assets. In addition, NBB and
BTC are eligible to borrow from the FHLB with borrowings collateralized by
qualifying assets, primarily residential mortgage loans totaling approximately
$99,843, and NBB and BTC's capital stock investment in the FHLB. At December 31,
2001, the available borrowing limit was approximately $85,000.

Note 4: Loans to Officers and Directors

In the ordinary course of business, the Company has granted loans to executive
officers and directors of Bankshares and its subsidiaries amounting to $5,782 at
December 31, 2001 and $2,084 at December 31, 2000. During the year ended
December 31, 2001, total principal additions were $6,972 and principal payments
were $3,274.

Note 5: Allowance for Loan Losses

An analysis of the allowance for loan losses follows:


                                                Years ended December 31,
                                        ---------------------------------------
($ In thousands)                            2001         2000          1999
- --------------------------------------- ------------ ------------ -------------

Balance at beginning of year              $ 3,886        3,231         2,679
Provision for loan losses                   1,408        1,329         1,400
Loans charged off                          (1,128)        (770)         (978)
Recoveries of loans previously
  charged off                                 106           96           130
                                        ------------ ------------ -------------

Balance at end of year                    $ 4,272        3,886         3,231
                                        ============ ============ =============
- --------------------------------------- ------------ ------------ -------------


    The following is a summary of information pertaining to impaired loans:

                                                     December 31,
                                                 ---------------------
($ In thousands)                                    2001       2000
- ------------------------------------------------ ---------- ----------
Impaired loans without a valuation allowance         $ 275        321
Impaired loans with a valuation allowance               65        135
                                                 ---------- ----------
Total impaired loans                                 $ 340        456
                                                 ========== ==========

Valuation allowance related to impaired loans        $  39        135
                                                 ========== ==========
- ------------------------------------------------ ---------- ----------

                                       22
<PAGE>

<TABLE>
<CAPTION>

                                                                      Years ended December 31,
                                                                   --------------------------------
($ In thousands)                                                      2001       2000       1999
- ------------------------------------------------------------------ ----------- ---------- ---------
<S>                                                                <C>         <C>        <C>
Average investment in impaired loans                                    $ 671        657       292
Interest income recognized on impaired loans                               57         43        13
Interest income recognized on a cash basis on impaired loans              ---        ---       ---
- ------------------------------------------------------------------ ----------- ---------- ---------
</TABLE>

        No additional funds are committed to be advanced in connection with
impaired loans. Nonaccrual loans excluded from impaired loan disclosure under
FAS 114 amounted to $59 at December 31, 2001. If interest on these loans had
been accrued, such income would have approximated $4. No nonaccrual loans were
excluded from impaired loan disclosure under FASB 114 at December 31, 2000 and
1999.

Note 6: Bank Premises and Equipment
    A summary of the cost and accumulated depreciation of premises and equipment
follows:


                                                            December 31,
                                                      ------------------------
($ In thousands)                                         2001         2000
- ----------------------------------------------------- ----------- ------------
Premises                                               $ 11,051      10,413
Furniture and equipment                                   7,435       7,040
Construction-in-progress                                     13         141
                                                      ----------- ------------
                                                         18,499      17,594
Less accumulated depreciation                            (8,367)     (7,270)
                                                      ----------- ------------
        Bank premises and equipment, net               $ 10,132      10,324
                                                      =========== ============
- ----------------------------------------------------- ----------- ------------

    Depreciation expense for the years ended December 2001, 2000 and 1999
amounted to $1,106, $1,015 and $903, respectively.
    The Company leases three branch facilities under noncancellable operating
leases. The future minimum lease payments under these leases (with initial or
remaining lease terms in excess of one year) as of December 31, 2001 are as
follows: $133 in 2002, $131 in 2003, $123 in 2004, $102 in 2005, $57 in 2006 and
$247 thereafter.

Note 7: Deposits

The aggregate amount of time deposits in denominations of $100 or more at
December 31, 2001 and 2000 was $77,214 and $72,307, respectively.
        At December 31, 2001, the scheduled maturities of time deposits are as
follows:

($ In thousands)
- ------------------------- ------------------
For the year:
    2002                          $ 236,661
    2003                             55,931
    2004                             12,084
    2005                             11,276
    2006                              5,180
    Thereafter                          678
                                  ---------
        Total maturities          $ 321,810
                                  =========
- ------------------------- ------------------


                                       23
<PAGE>

Note 8: Employee Benefit Plans

Pension Plans

The Company sponsors two separate noncontributory defined benefit pension plans
which cover substantially all of its employees. The pension plans' benefit
formulas generally base payments to retired employees upon their length of
service and a percentage of qualifying compensation during their final years of
employment.
      Effective January 1, 2002, the NBB plan was amended, restated, and renamed
The National Bankshares, Inc. Retirement Income Plan. At the same time, the BTC
plan was merged into it, and National Bankshares, Inc. and National Bankshares
Financial Services, Inc. were added as participating employers in the pension
plan. The merged NBI plan did not alter the eligibility standards of the bank
plans, and subtantially all employees are covered. The merged NBI plan benefit
formula is still based upon the length of service of retired employees and a
percentage of qualified W-2 compensation during their final years of employment.
        The NBB pension plan's assets are invested principally in U.S.
Government agency obligations (13%), mutual funds (29%), corporate bonds (26%),
equity securities (30%) and cash (2%). BTC's pension plan's assets are invested
principally in corporate bonds (23%), U.S. Government agency obligations (40%)
and equity securities (37%). Information pertaining to activity in the plans is
as follows:
                                                       Pension Benefits
                                                         December 31,
                                                 -----------------------------
($ In thousands)                                   2001      2000      1999
- ------------------------------------------------ --------- --------- ---------
Change in benefit obligation
Benefit obligation at beginning of year          $ 5,668     5,694     5,995
Service cost                                         422       354       398
Interest cost                                        422       425       415
Actuarial gain                                       (53)     (142)     (749)
Benefits paid                                       (445)     (663)     (365)
                                                 --------- --------- ---------
    Benefit obligation at end of year              6,014     5,668     5,694
                                                 --------- --------- ---------

Change in plan assets
Fair value of plan assets at beginning of year     4,692     4,877     4,971
Actual return on plan assets                          55       202        85
Employer contribution                                348       276       186
Benefits paid                                       (445)     (663)     (365)
                                                 --------- --------- ---------
  Fair value of plan assets at end of year         4,650     4,692     4,877
                                                 --------- --------- ---------
Funded status                                     (1,364)     (976)     (817)
Unrecognized net actuarial loss                      931       610       522
Unrecognized prior service cost                      171       186       201
Unrecognized transition asset                       (114)     (137)     (160)
                                                 --------- --------- ---------
Net accrued pension cost                         $  (376)     (317)     (254)
                                                 ========= ========= =========
- ------------------------------------------------ --------- --------- ---------

        The components of net periodic cost are as follows:

<TABLE>
<CAPTION>

                                                         Years ended December 31,
                                              -----------------------------------------------
($ In thousands)                                  2001            2000            1999
- --------------------------------------------- -------------- --------------- ----------------
<S>                                           <C>            <C>             <C>
Components of net periodic benefit cost
        Service cost                                 $ 422             354              398
        Interest cost                                  422             424              415
        Expected return on plan assets                (434)           (441)            (457)
        Amortization of prior service cost              15              15               15
        Recognized net actuarial loss                    5               8               18
        Amortization of transition asset               (23)            (23)             (23)
                                              -------------- --------------- ----------------
               Net periodic benefit cost             $ 407             337              366
                                              ============== =============== ================
- --------------------------------------------- -------------- --------------- ----------------
</TABLE>


                                       24
<PAGE>


      The actuarial assumptions for both plans are as follows:

<TABLE>
<CAPTION>

($ in thousands)
                                                           2001           2000           1999
- ------------------------------------------------------ -------------- -------------- -------------
<S>                                                    <C>            <C>            <C>
Weighted average assumptions as of December 31
Weighted average discount rate                             7.50%          7.50%         7.50%
Expected return on plan assets                             9.00%          9.00%         9.00%
Rate of compensation increase                              5.00%          5.00%         5.00%
- ------------------------------------------------------ -------------- -------------- -------------
</TABLE>


401(k) Plan

The Company has a Retirement Accumulation Plan qualifying under IRS Code Section
401(k), in which NBB and BTC are participating employers. Effective on January
1, 2002, National Bankshares, Inc. and National Bankshares Financial Services,
Inc. became participating employers in the plan. Eligible participants in the
plan can contribute up to 10% of their total annual compensation to the plan.
Employee contributions are matched by NBB and BTC based on a percentage of an
employee's total annual compensation contributed to the plan. Prior to 2000, NBB
was the only participating employer in the plan. For the years ended December
31, 2001 and 2000, NBB and BTC contributed $196 and $156, respectively, to the
plan. For the year ended December 31, 1999, NBB contributed $102.

Employee Stock Ownership Plan

Bankshares has a non-leveraged Employee Stock Ownership Plan (ESOP) which
enables employees who have one year of service and who have attained the age of
21 prior to the plan's January 1 and July 1 enrollment dates to own Bankshares
common stock. Effective on January 1, 2002, National Bankshares, Inc. and
National Bankshares Financial Services, Inc. joined NBB and BTC as participating
employers in the plan. Contributions to the ESOP for each participating employer
are determined annually by the Boards of Directors of the participating
employers if predetermined performance goals have been met. Contribution expense
amounted to $179, $162 and $162 for the years ended December 31, 2001, 2000 and
1999, respectively. Dividends on ESOP shares are charged to retained earnings.
As of December 31, 2001, the number of allocated shares held by the ESOP was
76,597 and the number of unallocated shares was 12,501. All shares held by the
ESOP are treated as outstanding in computing the Company's basic and diluted net
income per share. Upon reaching age 55 with ten years of plan participation, a
vested participant has the right to diversify 50% of his or her allocated ESOP
shares and Bankshares or the ESOP, with the agreement of the Trustee, would be
obligated to purchase those shares. The ESOP contains a put option which allows
a withdrawing participant to require Bankshares or the ESOP, if the plan
administrator agrees, to purchase his or her allocated shares if the shares are
not readily tradable on an established market at the time of its distribution.
Since the shares were not readily tradable at December 31, 1998, 77,301 shares
of stock held by the ESOP, at their estimated fair value, which was based on the
most recent available independent valuation, is recorded outside of
stockholders' equity as of December 31, 1998. Effective December 1, 1999,
Bankshares' common stock began trading on the Nasdaq SmallCap Market. As a
result of being listed on an established national exchange, presentation of the
fair value of the shares of common stock held by the ESOP outside of
stockholders' equity is no longer required at December 31, 1999.

Note 9: Stock Option Plan

Effective March 10, 1999, the Company adopted the National Bankshares, Inc. 1999
Stock Option Plan to give key employees of Bankshares and its subsidiaries an
opportunity to acquire shares of National Bankshares, Inc. common stock. The
purpose of the 1999 Stock Option Plan is to promote the success of Bankshares
and its subsidiaries by providing an incentive to key employees that enhances
the identification of their personal interest with the long term financial
success of the Company and with growth in stockholder value. Under the 1999
Stock Option Plan, up to 250,000 shares of Bankshares common stock may be
granted. The 1999 Stock Option Plan is administered by the Stock Option
Committee, which is made up of all of the non-employee, outside directors of
National Bankshares, Inc. The Stock Option Committee may determine whether
options are incentive stock options or nonqualified stock options and may
determine the other terms of grants, such as number of shares, term, a vesting


                                       25
<PAGE>


schedule and the exercise price. The 1999 Stock Option Plan limits the maximum
term of any option granted to ten years, states that options may be granted at
not less than fair market value on the date of the grant and contains certain
other limitations on the exercisability of incentive stock options. The options
vest 25% after one year, 50% after two years, 75% after three years and 100%
after four years. At the discretion of the Stock Option Committee, options may
be awarded with the provision that they may be accelerated upon a change of
control, merger, consolidation, sale or dissolution of National Bankshares, Inc.
At December 31, 2001, there were 216,000 additional shares available for grant
under the Plan.
      The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the stock option plan. Accordingly, no compensation cost has been
recognized. Pro forma compensation cost determined based on the fair value at
the grant dates for awards under the plan consistent with the method prescribed
in SFAS No. 123 was not material and had no impact on earnings per share as
presented. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: 2001 - expected cash dividend yield of 1.86%, risk-free interest
rate of 4.48%, expected volatility of 22.77%, and an expected life of ten years;
2000 - expected cash dividend yield of 1.79%, risk-free interest rate of 5.12%,
expected volatility of 19.52%, and an expected life of ten years; 1999 -
expected cash dividend yield of 3.41%, risk-free interest rate of 6.38%,
expected volatility of 18.60%, and an expected life of ten years.
        A summary of the status of the Company's stock option plan is presented
below:

<TABLE>
<CAPTION>

                                            2001                       2000                      1999
                                 --------------------------- ------------------------- -------------------------
                                                Weighted                   Weighted                  Weighted
                                                 Average                    Average                   Average
                                  Number of     Exercise      Number of    Exercise     Number of    Exercise
                                   Shares        Price          Shares       Price        Shares       Price
- -------------------------------- ----------- --------------- ----------- ------------- ----------- -------------
<S>                              <C>         <C>             <C>         <C>           <C>         <C>

Outstanding, beginning of year       18,000         $ 19.57       5,500       $ 22.00         ---        $  ---
Granted                              16,000           23.00      12,500         18.50       5,500         22.00
Exercised                               ---             ---         ---           ---         ---           ---
Forfeited                               ---             ---         ---           ---         ---           ---
Expired                                 ---             ---         ---           ---         ---           ---
                                        ---             ---         ---           ---         ---
Outstanding, end of year             34,000         $ 21.18      18,000       $ 19.57       5,500       $ 22.00
                                     ======         =======      ======       =======       =====       =======

Options exercisable at year-end       5,875         $ 20.14       1,375       $ 22.00         ---        $  ---
Weighted-average fair value of
  options granted during the year                   $  4.89                   $  3.90                    $ 2.38
- -------------------------------- ----------- --------------- ----------- ------------- ----------- -------------
</TABLE>




        Information pertaining to options outstanding at December 31, 2001 is as
follows:

<TABLE>
<CAPTION>

                                               Options Outstanding                  Options Exercisable
- -------------------------------------- ------------------------------------ ------------------------------------
     Remaining           Range of           Number        Weighted Average       Number       Weighted Average
 Contractual Life     Exercise Price      Outstanding      Exercise Price     Exercisable      Exercise Price
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------------
<S>                  <C>               <C>                <C>               <C>               <C>
    9.83 years          $ 23.00             16,000            $ 23.00              ---            $   ---
    8.83 years            18.50             12,500              18.50            3,125              18.50
    7.83 years            22.00              5,500              22.00            2,750              22.00
- -------------------- ----------------- ------------------ ----------------- ----------------- ------------------
</TABLE>


                                       26
<PAGE>


Note 10: Income Taxes

Allocation of income tax expense between current and deferred portions is as
follows:

                                           Years ended December 31,
                                      -----------------------------------
($ In thousands)                         2001        2000        1999
- ------------------------------------- ----------- ----------- -----------
Current                                 $ 2,451       3,016       2,770
Deferred                                   (166)       (253)       (214)
                                      ----------- ----------- -----------

        Total income tax expense        $ 2,285       2,763       2,556
                                      =========== =========== ===========
- ------------------------------------- ----------- ----------- -----------


        The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:


                                                Years ended December 31,
                                            ---------------------------------
($ In thousands)                               2001        2000      1999
- ------------------------------------------- ------------ --------- ----------
Computed "expected" income tax expense         $ 3,264     3,424      3,279
Tax-exempt interest income                      (1,239)     (862)      (866)
Nondeductible interest expense                     220       168        109
Other, net                                          40        33         34
                                            ------------ --------- ----------

        Reported income tax expense            $ 2,285     2,763      2,556
                                            ============ ========= ==========
- ------------------------------------------- ------------ --------- ----------


        The components of the net deferred tax asset, included in other assets,
are as follows:
<TABLE>
<CAPTION>

                                                                              December 31,
                                                                      -----------------------------
($ In thousands)                                                          2001           2000
- --------------------------------------------------------------------- -------------- --------------
<S>                                                                   <C>            <C>
Deferred tax assets:
    Allowance for loan losses and unearned fee income                     $ 1,155            995
    Valuation allowance on other real estate owned                             21             21
    Deferred compensation and other liabilities                               119            143
    Deposit intangibles and goodwill                                           78             68
    Community development corporation related tax credit                       11             15
    Other                                                                       9             36
    Net unrealized losses on securities available for sale                    ---            296
                                                                      -------------- --------------
                                                                            1,393          1,574
                                                                      -------------- --------------
Deferred tax liabilities:
    Net unrealized gains on securities available for sale                    (292)           ---
    Accumulated depreciation                                                  (71)           (93)
    Accumulated discount accretion                                            (72)           (74)
    Accrued late fee income                                                   (24)           (48)
    Other                                                                     (64)           (67)
                                                                      -------------- --------------
                                                                             (523)          (282)
                                                                      -------------- --------------
               Net deferred tax asset                                     $   870          1,292
                                                                      ============== ==============
- --------------------------------------------------------------------- -------------- --------------
</TABLE>

                                       27
<PAGE>


Note 11: Restrictions on Payments of Dividends and Capital Requirements

Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 2001, 2000
and 1999, dividends received from subsidiary banks were $3,761, $2,987 and
$10,538, respectively. Additional funds paid to the parents as dividends in 1999
were used primarily for a common stock repurchase.
      Substantially all of Bankshares' retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted by various
regulations administered by federal and state bank regulatory agencies. Bank
regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At December 31,
2001, retained net income, which was free of such restriction, at NBB, amounted
to approximately $1,059. BTC is permitted to pay dividends to the extent such do
not exceed current year net income.

Note 12: Minimum Regulatory Capital Requirements

The Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and the Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding
companies.
    Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2001 and 2000, that the Company and the Banks meet all capital adequacy
requirements to which they are subject.
        As of December 31, 2001, the most recent notifications from the
appropriate regulatory authorities categorized the Company and the Banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following tables. There are no conditions or events since these notifications
that management believes have changed the Company's and the Banks' category.

                                       28
<PAGE>


        The Company's and the Banks' actual capital amounts and ratios as of
December 31, 2001 and 2000 are also presented in the following tables.

<TABLE>
<CAPTION>
                                                                                               To Be Well
                                                                                            Capitalized Under
                                                                         For Capital        Prompt Corrective
                                                     Actual           Adequacy Purposes     Action Provisions
                                             ---------------------- --------------------- ----------------------
($ In thousands)                               Amount      Ratio     Amount      Ratio      Amount      Ratio
- -------------------------------------------- ----------- ---------- ---------- ---------- ----------- ----------
<S>                                          <C>         <C>        <C>        <C>        <C>         <C>
December 31, 2001
    Total capital (to risk weighted assets)

    Bankshares consolidated                    $ 57,231      12.9%     35,511       8.0%       N/A         N/A
    NBB                                          31,383      12.5%     20,150       8.0%      25,188      10.0%
    BTC                                          22,567      11.9%     15,105       8.0%      18,881      10.0%

    Tier I capital (to risk weighted assets)

    Bankshares consolidated                    $ 52,959      11.9%     17,756       4.0%       N/A         N/A
    NBB                                          28,781      11.4%     10,075       4.0%      15,113       6.0%
    BTC                                          20,897      11.1%      7,553       4.0%      11,329       6.0%

    Tier I capital (to average assets)

    Bankshares consolidated                    $ 52,959       8.4%     25,160       4.0%       N/A         N/A
    NBB                                          28,781       8.3%     13,927       4.0%      17,409       5.0%
    BTC                                          20,897       7.5%     11,079       4.0%      13,849       5.0%
- -------------------------------------------- ----------- ---------- ---------- ---------- ----------- ----------
</TABLE>

<TABLE>
<CAPTION>

                                                                                                To Be Well
                                                                                             Capitalized Under
                                                                        For Capital          Prompt Corrective
                                                     Actual           Adequacy Purposes      Action Provisions
                                             ---------------------- --------------------- ----------------------
($ In thousands)                               Amount      Ratio     Amount      Ratio      Amount      Ratio
- -------------------------------------------- ----------- ---------- ---------- ---------- ----------- ----------
<S>                                          <C>         <C>        <C>        <C>        <C>         <C>
December 31, 2000
    Total capital (to risk weighted assets)

    Bankshares consolidated                    $ 55,256      14.2%     31,073       8.0%       N/A         N/A
    NBB                                          28,234      11.6%     19,531       8.0%      24,414      10.0%
    BTC                                          24,601      17.3%     11,383       8.0%      14,228      10.0%

    Tier I capital (to risk weighted assets)

    Bankshares consolidated                    $ 51,371      13.2%     15,536       4.0%       N/A         N/A
    NBB                                          25,834      10.6%      9,765       4.0%      14,648       6.0%
    BTC                                          23,116      16.3%      5,691       4.0%       8,537       6.0%

    Tier I capital (to average assets)

    Bankshares consolidated                    $ 51,371       9.5%     21,721       4.0%       N/A         N/A
    NBB                                          25,834       8.2%     12,648       4.0%      15,810       5.0%
    BTC                                          23,116      10.2%      9,072       4.0%      11,340       5.0%
- -------------------------------------------- ----------- ---------- ---------- ---------- ----------- ----------
</TABLE>


                                       29
<PAGE>


Note 13: Parent Company Financial Information
        Condensed financial information of Bankshares (Parent) is presented
below:

<TABLE>
<CAPTION>

Condensed Balance Sheets
                                                                    December 31,
                                                            -----------------------------
($ In thousands, except share and per share data)                 2001          2000
- ----------------------------------------------------------- -------------- --------------
<S>                                                         <C>            <C>

Assets
Cash due from subsidiaries                                    $      76             38
Securities available for sale                                     2,879          2,365
Investment in subsidiaries, at equity                            62,428         57,405
Refundable income taxes due from subsidiaries                        29             11
Other assets                                                         45             46
                                                            -------------- --------------
        Total assets                                          $  65,457         59,865
                                                            ============== ==============
Liabilities and Stockholders' Equity
Other liabilities                                             $     196             31
Stockholders' equity                                             65,261         59,834
                                                            -------------- --------------

        Total liabilities and stockholders' equity            $  65,457         59,865
                                                            ============== ==============
- ----------------------------------------------------------- -------------- --------------
</TABLE>


<TABLE>
<CAPTION>

Condensed Statements of Income and Comprehensive Income

                                                                           Years Ended December 31,
                                                                     --------------------------------------
($ In thousands)                                                         2001         2000        1999
- -------------------------------------------------------------------- ------------- ----------- ------------
<S>                                                                  <C>           <C>         <C>
Income
Dividends from subsidiaries                                              $ 3,761       2,987       10,538
Interest on securities - taxable                                              12          11           17
Interest on securities - nontaxable                                           91          99          118
Other income                                                                 ---          40          ---
Realized securities losses                                                   (13)         (3)         ---
                                                                      ------------- ----------- ------------
                                                                           3,851       3,134       10,673

Expenses
Other expenses                                                               207         157          194
                                                                      ------------- ----------- ------------

Income before income tax benefit and equity in undistributed net
  income (distributions in excess  of equity in net income)
  of subsidiaries                                                          3,644       2,977       10,479

Applicable income tax benefit                                                 69          36           59
                                                                      ------------- ----------- ------------

Income before equity in undistributed net income (distributions in
  excess of equity in net income) of subsidiaries                          3,713       3,013       10,538


Equity in undistributed net income (distributions in
  excess of equity in net income) of subsidiaries                          3,601       4,296       (3,450)
                                                                     ------------- ----------- ------------
   Net income                                                            $ 7,314       7,309        7,088
                                                                     ============= =========== ============
- -------------------------------------------------------------------- ------------- ----------- ------------
</TABLE>


                                       30
<PAGE>


<TABLE>
<CAPTION>

Condensed Statements of Cash Flows

                                                                             Years ended December 31,
                                                                    --------------------------------------------
($ In thousands)                                                         2001           2000          1999
- ------------------------------------------------------------------- --------------- ------------- --------------
<S>                                                                 <C>             <C>           <C>
Cash Flows from Operating Activities
Net income                                                                $ 7,314         7,309          7,088
Adjustments to reconcile net income to net cash
  provided by operating activities:
    (Equity in undistributed net income) distributions in excess
        of equity in net income of subsidiaries                            (3,601)       (4,296)         3,450
    Amortization of premiums and accretion of  discounts, net                   5             6              7
    Realized securities losses                                                 13             3            ---
    Net change in refundable income taxes due from subsidiaries               (18)           48            (29)
    Net change in other assets                                                  3           (34)           (10)
    Net change in other liabilities                                           102            10            (45)
                                                                    --------------- ------------- --------------
    Net cash provided by operating activities                               3,818         3,046         10,461
                                                                    --------------- ------------- --------------

Cash Flows from Investing Activities
Purchases of securities available for sale                                   (777)         (529)          (207)
Maturities of securities available for sale                                   ---            30            299
Calls of securities available for sale                                         25           562            ---
                                                                    --------------- ------------- --------------
    Net cash provided by (used in) investing activities                      (752)           63             92
                                                                    --------------- ------------- --------------

Cash Flows from Financing Activities
Cash dividends paid                                                        (3,020)       (2,987)        (2,814)
Common stock repurchase                                                        (8)          (89)        (7,762)
                                                                    --------------- ------------- --------------
    Net cash used in financing activities                                  (3,028)       (3,076)       (10,576)
                                                                    --------------- ------------- --------------
Net change in cash                                                             38            33            (23)
Cash due from subsidiaries at beginning of year                                38             5             28
                                                                    --------------- ------------- --------------
Cash due from subsidiaries at end of year                                 $    76            38              5
                                                                    =============== ============= ==============
- ------------------------------------------------------------------- --------------- ------------- --------------

</TABLE>


                                       31
<PAGE>


Note 14: Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
      The Company's exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The Company
may require collateral or other security to support the following financial
instruments with credit risk:
    At December 31, 2001 and 2000, the following financial instruments were
outstanding whose contract amounts represent credit risk:

<TABLE>
<CAPTION>

                                                                      December 31,
                                                             -------------------------------
($ In thousands)                                                  2001            2000
- ------------------------------------------------------------ --------------- ---------------
<S>                                                          <C>             <C>
Financial instruments whose contract amounts represent
  credit risk:
        Commitments to extend credit                             $ 78,749        60,614
        Standby letters of credit                                $  6,045         4,269
        Mortgage loans sold with potential recourse              $ 27,102        20,358
- ------------------------------------------------------------ --------------- ---------------
</TABLE>


      Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on management's
credit evaluation of the customer.
      Unfunded commitments under commercial lines of credit, revolving credit
lines, and overdraft protection agreements are commitments for possible future
extensions of credit. Some of these commitments are uncollateralized and do not
contain a specified maturity date and may not be drawn upon to the total extent
to which the Company is committed.
      Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
      The Company originates mortgage loans for sale to secondary market
investors subject to contractually specified and limited recourse provisions. In
2001, the Company originated $28,247 and sold $27,102 to investors, compared to
$20,129 originated and $20,358 sold in 2000. Every contract with each investor
contains certain recourse language. In general, the Company may be required to
repurchase a previously sold mortgage loan if there is major noncompliance with
defined loan origination or documentation standards, including fraud, negligence
or material misstatement in the loan documents. Repurchase may also be required
if necessary governmental loan guarantees are canceled or never issued, or if an
investor is forced to buy back a loan after it has been resold as a part of a
loan pool. In addition, the Company may have an obligation to repurchase a loan
if the mortgagor has defaulted early in the loan term. This potential default
period is approximately twelve months after sale of a loan to the investor.
    The Company maintains cash accounts in other commercial banks. The amount on
deposit with correspondent institutions at December 31, 2001 that exceeded the
insurance limits of the Federal Deposit Insurance Corporation was $562.


                                       32
<PAGE>


Note 15: Concentrations of Credit Risk

The Company does a general banking business, serving the commercial and personal
banking needs of its customers. NBB's market area, commonly referred to as
Virginia's New River Valley and Mountain Empire, consists of Montgomery, Giles
and Pulaski Counties and the cities of Radford and Galax, together with portions
of adjacent counties. BTC's market area adjoins NBB's and includes the counties
of Tazewell, Wythe, Smyth and Washington in Virginia, as well as contiguous
portions of McDowell and Mercer Counties in West Virginia. Substantially all of
NBB's and BTC's loans are made within their market area. The ultimate
collectibility of the banks' loan portfolios and the ability to realize the
value of any underlying collateral, if needed, are influenced by the economic
conditions of the market area. The Company's operating results are therefore
closely correlated with the economic trends within this area.
      At December 31, 2001 and 2000, approximately $176,667 and $151,000,
respectively, of the loan portfolio was concentrated in commercial real estate.
This represents approximately 44% and 42% of the loan portfolio at December 31,
2001 and 2000, respectively. Included in commercial real estate at December 31,
2001 and 2000 was approximately $100,640 and $84,000, respectively, in loans for
college housing and professional office buildings. Loans secured by residential
real estate were approximately $119,437 and $110,000 at December 31, 2001 and
2000, respectively. This represents approximately 30% and 31% of the loan
portfolio at December 31, 2001 and 2000 respectively. Loans secured by
automobiles were approximately $32,373 and $36,000 at December 31, 2001 and
2000, respectively. This represents approximately 8% of the loan portfolio at
December 31, 2001 and 10% at December 31, 2000.
      The Company has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property and with loan
amounts established based on certain percentage limitations of the property's
total stated or appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the individual borrower
or project based on available financial information. Management considers the
concentration of credit risk to be minimal.

Note 16: Fair Value of Financial Instruments and Interest Rate Risk

The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of the
Company.
      Loan commitments on which the committed interest rate is less than the
current market rate are insignificant at December 31, 2001 and 2000.
      The Company assumes interest rate risk (the risk that general interest
rate levels will change) as a result of its normal operations. As a result, the
fair values of the Company's financial instruments will change when interest
rate levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment. Conversely, depositors who are receiving fixed rates are more
likely to withdraw funds before maturity in a rising rate environment and less
likely to do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest rate risk
by adjusting terms of new loans and deposits.


                                       33
<PAGE>


The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:

Cash and Due from Banks, Interest-Bearing Deposits, and Federal Funds Sold

The carrying amounts approximate fair value.

Securities

The fair values of securities are determined by quoted market prices or dealer
quotes. The fair value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments adjusted for
differences between the quoted instruments and the instruments being valued.

Loans Held for Sale

Fair values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.

Loans

Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as mortgage loans held for
sale, commercial, real estate - commercial, real estate - construction, real
estate - mortgage, credit card, and other consumer loans. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
      The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan, as well as
estimates for prepayments. The estimate of maturity is based on the Company's
historical experience with repayments for loan classification, modified, as
required, by an estimate of the effect of economic conditions on lending.
      Fair value for significant nonperforming loans is based on estimated cash
flows which are discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market
information and specific borrower information.

Deposits

The fair value of demand and savings deposits is the amount payable on demand.
The fair value of fixed maturity term deposits and certificates of deposit is
estimated using the rates currently offered for deposits with similar remaining
maturities.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Other Borrowed Funds

Other borrowed funds represents treasury tax and loan deposits and short-term
borrowings from the Federal Home Loan Bank. The carrying amount is a reasonable
estimate of fair value because the deposits are generally repaid within 1 to 120
days from the transaction date.


Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit, standby letters of
credit, and financial guarantees written are the deferred fees arising from
these unrecognized financial instruments. These deferred fees are not deemed
significant at December 31, 2001 and 2000, and as such, the related fair values
have not been estimated.


                                       34
<PAGE>


    The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>

                                                         December 31,
                                              2001                          2000
                                  ------------------------------ ----------------------------
($ In thousands)                    Carrying       Estimated       Carrying      Estimated
                                     Amount        Fair Value       Amount      Fair Value
- --------------------------------- -------------- --------------- ------------- --------------
<S>                               <C>            <C>             <C>           <C>
Financial assets:
    Cash and due from banks           $  12,293          12,293        11,130         11,130
    Interest-bearing deposits            15,510          15,510        13,579         13,579
    Federal funds sold                    1,080           1,080        29,090         29,090
    Securities                          191,476         191,901       156,344        156,387
    Mortgage loans held for sale          1,145           1,145           ---            ---
    Loans, net                          394,042         457,965       355,795        348,753
    Accrued interest receivable           4,917           4,917         5,049          5,049

Financial liabilities:
    Deposits                          $ 576,618         577,612       530,648        531,829
    Other borrowed funds                    203             203           270            270
    Accrued interest payable              1,101           1,101         1,538          1,538
- --------------------------------- -------------- --------------- ------------- --------------
</TABLE>


Note 17: Branch Acquisitions

On August 17, 2000, the Company entered into an agreement to purchase six
branches from AmSouth Bank of Birmingham, Alabama. The acquisitions involved
approximately $94,000 in deposits and $42,000 in loans. Three of the branches,
Radford, Dublin and Pulaski, Virginia were acquired by the Company's NBB
affiliate, with the remaining offices located in Wytheville, Abingdon and
Marion, Virginia acquired by the Company's BTC affiliate. The acquisition was
completed in November of 2000.
        In another move to improve the Company's competitive position, BTC
announced on September 15, 2000 that it would acquire a branch in Bluefield,
Virginia from First Union National Bank. The acquisition involved the purchase
of approximately $34,000 in deposits and $9,200 in loans. The acquisition was
completed in the first quarter of 2001.


                                       35
<PAGE>


Selected Quarterly Data (unaudited)

The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2001 and 2000:

<TABLE>
<CAPTION>

($  In  thousands,  except                                    2001
share data)
                                   ------------------------------------------------------------
                                       First                           Third         Fourth
                                      Quarter       Second Quarter    Quarter       Quarter
- ---------------------------------- --------------- --------------- -------------- -------------
<S>                                <C>             <C>             <C>            <C>
Income Statement Data:
- ---------------------
Interest income                        $   11,381          11,682         11,446        11,018
Interest expense                            5,998           6,185          5,695         4,893
                                   --------------- --------------- -------------- -------------
Net interest income                         5,383           5,497          5,751         6,125
Provision for loan losses                     332             332            377           367
Noninterest income                          1,195           1,296          1,312         1,401
Noninterest expense                         4,061           4,285          4,176         4,431
Income taxes                                  569             495            600           621
                                   --------------- --------------- -------------- -------------

    Net income                         $    1,616           1,681          1,910         2,107
                                   =============== =============== ============== =============
Per Share Data:
- --------------
Basic net income per share             $     0.46            0.48           0.54          0.60
Cash dividends per share                      ---            0.43            ---          0.43
Book value per share                        17.91           17.94          18.70         18.59

Selected Ratios:
- ---------------
Return on average assets                    1.06%           1.04%          1.18%         1.30%
Return on average equity                   10.54%          10.83%         11.84%        12.69%
Average equity to average assets           10.09%           9.63%          9.94%         9.97%
- ---------------------------------- --------------- --------------- -------------- -------------
</TABLE>

<TABLE>
<CAPTION>

($  In  thousands,  except                                    2000
share data)
                                   ------------------------------------------------------------
                                       First                           Third         Fourth
                                      Quarter      Second Quarter     Quarter       Quarter
- ---------------------------------- --------------- --------------- -------------- -------------
<S>                                <C>             <C>             <C>            <C>
Income Statement Data:
- ---------------------
Interest income                          $  8,844           9,286          9,586        10,642
Interest expense                            3,886           4,274          4,550         5,453
                                   --------------- --------------- -------------- -------------
Net interest income                         4,958           5,012          5,036         5,189
Provision for loan losses                     353             313            331           332
Noninterest income                            925             962            976         1,219
Noninterest expense                         2,991           3,094          3,291         3,500
Income taxes                                  687             698            639           739
                                   --------------- --------------- -------------- -------------

    Net income                           $  1,852           1,869          1,751         1,837
                                   =============== =============== ============== =============

Per Share Data:
- --------------
Basic net income per share               $   0.53            0.53           0.50          0.52
Cash dividends per share                      ---            0.42            ---          0.43
Book value per share                     $  15.54           15.64          16.39         17.04

Selected Ratios:
- ---------------
Return on average assets                    1.58%           1.54%          1.42%         1.33%
Return on average equity                   13.98%          13.94%         12.42%        12.52%
Average equity to average assets           11.30%          11.05%         11.46%        10.62%
- ---------------------------------- --------------- --------------- -------------- -------------
</TABLE>

                                       36
<PAGE>







               On January 3, 2002, the Directors and employees of
              National Bankshares were deeply saddened by the death
                                       of

                            DR. CHARLES L. BOATWRIGHT

   Dr. Boatwright served as a Director of The National Bank of Blacksburg for
    more than thirty-seven years and as its Vice-Chairman from 1992 to 1999.
       He also served as a Director for National Bankshares, Inc. from the
      corporation's founding in 1986 and was the Vice-Chairman of the Board
         from 1992 to 2002. Because he was widely respected and greatly
        admired, he was a positive and effective representative of NBB in
             the community. Dr. Boatwright brought strong and quiet
           leadership, wise counsel, strength of conviction, and good
             humor to his Board service. He will be greatly missed.






                                       37
<PAGE>



Boards of Directors
                Picture "National Bankshares Board of Directors"

National Bankshares, Inc. Board of Directors
Foreground,  from  left:  William T.  Peery,  Retired;  Cameron L.  Forrester,
President  and Chief  Executive Officer,  Bank of Tazewell  County;  Alonzo A.
Crouse,  Executive Vice President,  Secretary,  Bank of Tazewell County;
Jeffrey R. Stewart,  Educational Consultant;  James G. Rakes, Chairman of the
Board,  President,  Chief Executive  Officer,  National  Bankshares,  Inc.,
President and Chief  Executive  Officer,  The National Bank; President and
Treasurer,  National  Bankshares  Financial  Services,  Inc.; L. Allen Bowman,
Retired;  Paul A. Duncan;  President,  Holiday Motor Corp.; James A. Deskins,
Sr., Retired; James M. Shuler,  Delegate,  Virginia House of Delegates
(not pictured).

                 Picture "The National Bank Board of Directors"

The National Bank Board of Directors
From left: Ellen G. Burnop,  Co-Owner,  New River Office Supply; J. Louis Webb,
Jr.,  Dentist;  Paul P. Wisman, Vice  President of  Investments,  Grundy
National Bank,  Manager of Assets,  Nicewonder  Investments;  Paul A. Duncan,
President,  Holiday  Motor Corp;  James G. Rakes,  Chairman,  President and
Chief  Executive  Officer, National  Bankshares,  Inc., President and Chief
Executive Officer, The National Bank, President and Treasurer, National
Bankshares  Financial  Services;  L. Allen Bowman,  Vice-Chairman of the Board,
Retired;  Jeffrey R. Stewart,  Chairman  of the  Board,  Educational
Consultant;  James  M.  Shuler,  Delegate,  Virginia  House of Delegates.


                                       38
<PAGE>


              Picture "Bank of Tazewell County Board of Directors"

Bank of Tazewell County Board of Directors
Seated,  from left:  James G. Rakes,  Chairman,  President and Chief Executive
Officer,  National  Bankshares, Inc., President and Chief Executive Officer,
The National Bank,  President and Treasurer,  National Bankshares Financial
Services,  Inc.;  Cameron L.  Forrester,  President and Chief  Executive
Officer,  Bank of Tazewell County;  William T. Peery, Retired;  E.P. Greever,
Retired;  J.M. Pope, Retired;  Alonzo A. Crouse,  Executive Vice President,
Secretary,  Bank of Tazewell County.  Standing, from left: William H. VanDyke,
Vice President, Candlewax  Smokeless Fuel Co; James A. Deskins,  Sr.,  Retired;
James S. Gillespie,  Jr.,  President,  Jim Sam Gillespie Farm; Charles E. Green,
III, Financial Planner,  AXA Advisors,  LLC; Jack Harry,  President,  Harry's
Enterprises, Inc.

The National Bank Advisory Boards:

Montgomery County Advisory Board
Dan A. Dodson, W. Clinton Graves, Gary A. Huff, Mary Guy Miller, James J. Owen,
Robert L. Pack, Arlene A. Saari, James C. Stewart, T. Cooper Via

Giles County Advisory Board
Paul B. Collins, John H. Givens, Jr., Robert C. McCracken, Ross E. Martin,
Kenneth L. Rakes, Scarlet B. Ratcliffe, Morris D. Reece, H. M. Scanland, Jr.

Galax Advisory Board
Willie T. Green, Sr., Jerry R. Mink, Kathy J. Price, James A. Williams, Jr.

Radford/Pulaski County Advisory Board
Gary C. Elander, Jack M. Lewis, Jack D. Nunley


Bank of Tazewell County Advisory Boards:

Bluefield Advisory Board
Michael E. Dye, William H. King, Daniel G. MacMillan, Constance M. Saunders

Richlands Advisory Board
Steven R. Davis, Marvin D. Harman, Peter M. Mulkey


                                       39
<PAGE>


Corporate Information

National Bankshares, Inc. Executive Officers

    James G. Rakes, Chairman                       F. Brad Denardo
    President and Chief Executive Officer          Corporate Officer

    J. Robert Buchanan                             Cameron L. Forrester
    Treasurer                                      Corporate Officer

    Marilyn B. Buhyoff
    Secretary and Counsel

Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 9, 2002 at
3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.

Corporate Stock
National Bankshares, Inc. common stock trades on the Nasdaq Stock Market under
the symbol "NKSH".

Financial Information
Investors and analysts seeking financial information about National Bankshares,
Inc. should contact:

    James G. Rakes, Chairman           or      J. Robert Buchanan
    President and Chief Executive Officer      Treasurer
    (540) 951-6300 or (800) 552-4123           (540) 951-6300 or (800) 552-4123
    jrakes@nbbank.com                          bbuchanan@nbbank.com

Written requests may be directed to: National Bankshares, Inc. P.O. Box 90002,
Blacksburg, VA 24062-9002

Stockholder Services and Stock Transfer Agent
Stockholders seeking information about National Bankshares, Inc. stock accounts
should contact:
    Marilyn B. Buhyoff
    Secretary and Counsel
    (540) 951-6300 or (800) 552-4123
    mbuhyoff@nbbank.com

The National Bank of Blacksburg serves as transfer agent for National
Bankshares, Inc. stock.

Written requests and requests for stock transfers may be directed to: National
Bankshares, Inc., P.O. Box 90002, Blacksburg, VA 24062-9002.

A copy of National Bankshares, Inc.'s annual report to the Securities and
Exchange Commission on Form 10-K will be furnished without charge to any
stockholder upon written request.

Corporate Office
    National Bankshares, Inc.
    101 Hubbard Street
    Blacksburg, Virginia 24060
    P.O. Box 90002
    Blacksburg, Virginia 24062-9002
    www.nationalbankshares.com
    (540) 951-6300


                                       40
<PAGE>



</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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